What’s a stock market correction?

When the market drops 10%, it doesn’t necessarily mean things are right.

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It recently became official: We’re into stock market correction territory. What does that actually mean?

In the world of investing, a correction is a drop of 10% or more in the middle of a long-term rise in the price of a stock, bond, or the whole market. It means things are generally going in the right direction, and now they’re going to slow their roll a smidge. 

So does a correction mean the market is now, by the first dictionary definition of the word, correct? Not quite. There is the theory that a quick price drop means investors have suddenly figured out that a particular stock was overvalued and “fixed” that mistake. In the case of the current correction, investors are selling stock of companies that may be, or have been, affected by the coronavirus. Only time will tell if this correction was, well, correct.

A stock market correction may or may not be correct.

Should you be worried? If you have a diversified portfolio designed with your time horizons in mind, probably not! Stock-market corrections have happened 26 times since the Second World War, (including) twice in 2018 alone! The main thing to know is that on average, the losses are made up within four months. And during that time, younger investors have a chance to buy the dip.