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Market Correction

Definition, Recognition and Application of Market Trends


Definition: A market correction is a secondary or short-term stock market trend where stock prices fall 5-20% over a relatively short period of time, such as a few weeks or up to several months. For reference, a bear market trend is a more prolonged downward trend in stock prices of more than 20%.

Application: A correction in market prices is best recognized as a healthy aspect of a bull market. Often stock prices can appreciate above what is perceived by investors as fair value and a significant and temporary decline in prices can be necessary for the upward trend (bull market) to continue its rise.

Some investors may perceive a correction as a good time to buy more shares of stocks or stock mutual funds at relatively lower prices before the bull market trend resumes. However, other investors may detect a new and prolonged downward trend continuing into a full bear market trend and reduce their exposure to stocks or stock mutual funds.

For most investors, it is wise to avoid market timing and remain fully invested and even continue contributing regularly (dollar-cost averaging) into long-term savings vehicles, such as IRAs and 401(k)s.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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