What you need to know about corrections

Stock market correction happens when the market falls 10% or more from it recent peak. Correction can occur in securities or any other asset class. To knew investors this may come as a big surprise but corrections are natural part of market cycle that happen often and they can even strengthen the market. It is caused by certain events that triggers selling but market usually makes up loses in couple of months. Correction is not the same as the stock market crash. Correction happens when fall of 10% manifests itself over days, weeks or months while stock market crash happens when price drops by 10% in one single day. Stock market is one of the main indicators of economic health since buying and selling of securities is based on investors projections, whether they have positive or negative expectations of future market movements.

Corrections don't last long, usually it is three or four months and they can happen more than once a year. They happen during expansion phase and it is not uncommon that during bull market prices of securities get overblown. In this case correction helps the market by adjusting overvalued assets prices. What this means for investors? In any case diversified portfolio and long term investing strategies have proved itself over the years as the best for mitigating loss in time of crisis. Appropriate asset allocation that corresponds with your risk tolerance and financial and investment goals is key to mitigating possible financial blows. Also,you should rebalance your portfolio at least once a year which means that current asset allocation will be returned to target allocation that was set at the beginning. Apart from adjusting asset prices correction allows investors to buy securities at lower prices which means you can buy some high quality stock at a bargain. Investors can set stop-loss or stop-limit orders so they reflect current market situation and true asset values.

Some equities are more susceptible to market correction, small cap companies, high growth stock and volatile sectors like technology. Type of investor that correction hurts the most short term traders, active traders, day traders and ones that heavy leveraged their account with the use of margin. Stock market usually rebounds quickly after corrections but sometimes it can turn into prolonged decline that lead to contraction in economy and recession, period characterized by decline in GDP, income, employment, production and sales.

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