Stock Market Corrections Explained

A stock market correction occurs when either an individual security or the entire stock market declines by 10 to 20 percent following a peak. Corrections are a normal part of financial markets and last around four months on average.

The reasons behind a market correction can vary widely depending on whether it’s a large-scale dip in the stock market or a correction for a single stock. Under normal conditions, the stock market goes through periods of volatility, which feature rapid sales and pullbacks from individual stocks. Sometimes, when many people sell stock at the same time, a market correction occurs. Company mismanagement can also lead investors to sell their stock in a company, causing a correction for an individual stock.

When stock valuations decline over a fixed period of time, Wall Street investors refer to the phenomenon as a bear market (the opposite of a bull market). Typically, a bear market refers to a downturn of 20 percent or more in stock prices over at least a two-month period, but typically ranging from around six months to two years. By contrast, a market correction is a short-term phenomenon with lower overall declines—generally 10 to 20 percent over an average of four months.

A stock market crash is a far more serious event than a correction. In a crash—such as 1929's Black Tuesday, which set off the Great Depression—the value of individual stocks can plummet to nearly zero. A correction, by contrast, only shows declines of around 10 percent from recent peaks. As opposed to the more drawn-out decline of a bear market, a crash occurs suddenly over the course of a single day or week.

All investments and investment strategies entail inherent risks and introduce the potential for financial loss or the depreciation of assets. The information presented in this article is for educational, informational, and referential purposes only. Consult a professional investment advisor before making any financial commitments.

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