Correction

AAA

DEFINITION of 'Correction'

A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either.

One way analysts attempt to predict whether a market is headed for a correction is to compare one market index to a similar index. For example, if the U.K.'s FTSE 100 has recently underperformed, the S&P 500 in the U.S. might follow suit.

BREAKING DOWN 'Correction'

When the market is showing a trend of closing lower, a correction may be at hand. A correction in the market as a whole does not necessarily tell us how any one stock is performing, however. A stock may remain strong despite a correction - for example, consumer staples tend to perform steadily in any market. A stock could also perform about the same as the overall market during a correction, or it could plummet even further than the overall market. A correction can be a opportunity for value investors to pick up good companies at bargain prices.

RELATED TERMS
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  2. Capitulation

    When investors give up any previous gains in stock price by selling ...
  3. Falling Knife

    A slang phrase for a security or industry in which the current ...
  4. Bear Market

    A market condition in which the prices of securities are falling, ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier ...
  6. Bloodletting

    A period marked by severe investing losses. Bloodletting may ...
Related Articles
  1. Investing Basics

    The Five Biggest Stock Market Myths

    Stocks that go down must come up, right? Wrong. We bust this myth and four other common market misconceptions.
  2. Technical Indicators

    Be Aware Of The Hindenburg

    This indicator can protect your profits from going into a tailspin.
  3. Options & Futures

    What Can Traders Learn From Investors?

    Discover tips from a long-term strategy that can help you make better short-term trades.
  4. Forex Education

    Trading Divergences In Forex

    We compare the results of two forex trades based on MACD histogram divergences.
  5. Active Trading

    Connecting Crashes, Corrections And Capitulation

    Even though crashes, corrections and capitulations are bad news for investors holding the stock, there are still ways to profit.
  6. Options & Futures

    Market-Based Asset Allocation Lowers Your Risk

    Not all investors are incredibly brave with their money. Thankfully, there are ways to measure your risk level.
  7. Active Trading

    Traders: Profit From Other Investors' Fear

    Learn to pounce on the opportunity that arises when other traders run and hide.
  8. Active Trading

    Tales From The Trenches: A Simple Bollinger Band® Strategy

    Spot extreme short-term price drops and profit on the rebound.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Hong Kong

    Learn about the iShares MSCI Hong Kong fund, which invests in various equities of companies listed on the Hong Kong Stock Exchange.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Growth

    Take a close look at the Vanguard Small-Cap Growth ETF, which focuses on domestic small-cap equities with a fundamental growth strategy.
RELATED FAQS
  1. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  2. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  3. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  4. Is Japan an emerging market economy?

    Japan is not an emerging market economy. Emerging market economies are characterized by low per capita incomes, poor infrastructure ... Read Full Answer >>
  5. How does an IRA grow over time?

    Individual retirement account, or IRA, growth depends on many factors, including what types of investments are included in ... Read Full Answer >>
  6. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  2. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  3. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  4. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  5. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  6. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!