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.

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