WHAT ARE CORRECTIONS IN MARKET?
Corrections usually are referred to as a fall of 10% or more from its latest high. It is a phenomenon which is quite normal in stock exchange to correct the price of the stocks, index, commodity among others, listed in the stock exchange due to various reasons such as intense pessimism around the economy, declining factors of macro economics, over inflation, securities specific factors in the markets and so on.
In market correction, when price begins to go down, a sentiment of fear prevails, and suddenly an active selling happens. The market sell offs run for a while which depends upon the strength of correction and against after a point, buying begins by putting an end to the sale.
Almost all the corrections have similarities in light of excess buying, a sudden slump in prices, a fear ridden market, euphoric attitude with a strong bullish trend, consistent newer lows, adverse information regarding the economy of respective entities etc.
WHY DO IT HAPPENS?
It is quite tough to time the market and predict the exact point from where the correction will start. But the indicators are quite evident for an approaching downfall. There are different ways through which we can foresee the timing of correction, such as the charting method which studies and observes the prices to conclude the trend in the market.
Also, other indications such as negative economic situations, unfavoured policy decisions of the government, stock specific adverse news with a lasting effect can lead to the downfall in the market.
One of the most significant reasons can be the euphoria or intense buying sessions in the market. To keep prices in equilibrium or to provide an accurate picture, the situation also warrants a correction.
HOW IT CAN BE HANDLED?
Well, a sharp decline is quite difficult to digest even for an experienced investor but the correction are good and healthy too if the ticks are known to the investors:
- It can be a good time to diversify your portfolio by including bonds, real estate, commodities and other asset classes. A further correction will happen in future too and it gives a good lesson to investors not to keep all eggs in one basket.
- The valuation of almost all securities fall and the market selloff is the perfect time to purchase some fundamentally strong shares for a long term at a steep discount.
- Do nothing strategy helps a lot when investors are holding fundamentally strong stocks. As in the future, the prices will go up and it won’t make a dent in the investors pocket if the tenure is for a long term.
- It offers a good trading opportunity to bearish traders as technical analysis in most cases can be used regarding the next movement of the prices.
UPSIDES OF CORRECTIONS
- When a correction happens in the market, generally all the stocks or securities types dip. Many times, good quality securities are also dragged in this frenzy and it provides a great opportunity to buy good stocks at comparatively lower prices.
- In times of euphoria or excessive buying on newer peaks with no reliable and sustainable reasons, the market needs to get corrected.
- It also gives a great opportunity to cover up the positions for traders carrying the short positions.
- In a sharp downturn of the market, companies float share buyback offers as the market prices of the securities could be low or closer to the fundamental prices and investors are found to be in a selling spree.
DOWNSIDES OF CORRECTIONS
- As we have seen in the recent falls, the market takes away all the gains rapidly what it has offered over time. And sometimes the fall also brings an active bear market accompanied by a further decline in the prices. The prolonged bear market hurts the economy and is considered a big negative.
- Correction results in a falling market which creates panic in the market. Also it brings upon a strong selling trend because a fear prevails that it could further go and thus the trend may continue.
- The sudden downturn affects the leveraged traders profitability. Leverage is a double edged sword as it provides an option to lose or earn in multiples of one’s capital.
Though the continuing market corrections are painted in the negative light due to different reasons like negative in the economy, losses in securities, significant bearish movement, a healthy correction is quite beneficial to end the excessive buying, ending the bullish euphoria and price equilibrium and hence required for a thriving market!