I’m sure you must have heard or read the words stock market correction one too many times now, either at a dinner party or in the newspapers or even on T.V.
What are stock market corrections?
When the prices of stocks rise consistently, they become more valuable on the market (overvalued) than what they’re worth in real life. This is when people sell stocks off for a profit, leading to a fall in their prices. Typically prices drop by 10-20% until the market is corrected.
Why do they happen?
Heard the phrase ‘what goes up must come down’ stock markets work just like that. When the markets have significantly been doing well for a long time and share prices of companies rise up a correction is needed to bring back share prices to what they should be. Just like a cleanse or a detox.
Stock market corrections happen due to a number of reasons, the most recent correction that happened between February 2018 to March 2018 was mostly because of a fall in markets globally and the imposition of long-term capital gains tax.
So should you be concerned when they happen?
Not really, corrections are normal and in fact good for markets. If they don’t happen they push markets into a bubble territory. Corrections give investors a chance to enter the markets at better prices but also make good returns on them in the medium-long run.
When should you be concerned?
Corrections are a drop in the share prices in the range of 10%-20%. Anything below 20% is a sign of a bearish market. That’s when you need to be concerned. Bearish markets happen because of a poor performing economy. People sell their shares and avoid stock markets as they are risky.
What to do in a market correction?
Here’s what you can do during corrections:
- Don’t panic. Remain invested.
- Make sure you have backup assets. If your stocks are doing badly, at least you’ll have assets like gold, bonds, real estate, etc. to fall back on.
- Buy some gold. It acts as a good “hedge” against fluctuating investments. Keep 5-15% of your money in gold.
- Quality is key. Hold on to “large-cap” stocks as shares of high-quality companies recover quickly from a correction.
- Consider “mid-cap” stock investments carefully. They might be attractive because of their high returns, but these smaller/growing companies don’t recover back from market fluctuations very easily.
So now that you’ve got an idea about corrections the next time they’re around don’t panic but face it head on! Got any more questions, comment below and let us know.