Market Correction

Posted in Finance, Accounting and Economics Terms, Total Reads: 564
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Definition: Market Correction

Market Correction is the reverse movement in prices of stock, bond, commodity, index or market as whole, by at least 10%-15% in order to adjust to the market overvaluation. Overvaluation generally occurs due to some kind of events which create fear and subsequent panicked selling. Market Correction is a type of Secondary Market Trend (opposite movement of the security or market on temporary basis)

Market corrections are short term in an uptrend market and are necessary for the stability of security. Despite correction, some stock like consumer staples perform steadily.

Market corrections takes place in bull market (an uptrend market). When prices don’t recover promptly after correction, then one can predict the beginning of bear market (a market which has long-term downtrend).

Example:

Consider a Stock A, valued at $ 60. Anticipating profits in future, investors continue purchasing Stock A and as a result its demand gets pushed up. Due to high demand, price of stock increases at alarming rate to $ 100. Now, after certain period, investors stop purchasing Stock A at such high prices and those owning them will start selling it to make maximum profits. Consequently, supply of Stock A increases than demand and as a result its price decreases to $ 85. This type of market adjustment is called as market correction. Here we can see that Stock A experiences market correction of 15%.



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