The main reason for some investors to be wary of the share market and stock investing in general, is that such markets are prone to be unsteady. Investors say that they would rather ‘be safe than sorry’ and invest their precious wealth in relatively secure investment instruments like government - issued bonds and fixed deposits. Those who call the stock market ‘a roller coaster ride’ are not entirely wrong and the share market can be volatile. However, it is important to note that savvy investors and traders can gauge market volatility to a certain degree and mitigate any potential loss.
If you are an avid investor, with most of your investments in stocks, or even wish to venture into the share market to trade and invest, it is imperative to know about stock market corrections. Defined as a drop from prior high prices, of at least 10%, a stock market correction has a negative connotation simply because of stock prices falling. Although this may make you break into a sweat, it doesn’t necessarily have adverse implications. In fact, the view of most investors is that this is quite natural in stock market trading. With this in mind, there are eight things you should be aware of where corrections in the stock market are concerned.
Once you are armed with a certain amount of knowledge about stock market correction, you won’t be that perturbed by the very mention of the term. Here are 8 things you should know:
1. Decline and Types -
There are only two directions that the markets travel in, either up or down. However, when the market slides, there are different kinds of slides. For instance, a ‘pullback’ is a retracement of market prices by about 5%. A correction, on the other hand, is somewhat more significant, with a rollback of 10%-20% relevant to prior highs. Then you have what is called a ‘bear market’, which indicates prices being lower than 20% from any peaks reached previously. This may last longer than a pullback or a correction. The silver lining when you buy shares online is that bear markets last for a shorter span than bull markets.
2. Inevitable Corrections -
For markets to remain in a healthy state, corrections are the only obvious way to reach a balance. If markets reach sky-high limits, it means that other areas of a country’s finances are in trouble, like inflation rising. Corrections mean that investors can purchase stocks at reasonable rates.
3. Heightened Volatility -
During a correction, volatility, or the VIX (volatility index) has been viewed as rising to supersonic heights. This is because sentiments of investors are in flux and a gamut of emotions influences market prices.
4. Not Predictable -
Stock market corrections cannot be predicted, although the phenomenon is as common as the light of day. What’s more, a stock market crash doesn’t have a definite reason. Some investors in the share market base predictions on historical data, but this isn’t a sure thing.
5. Long-Term Investment Opportunity -
Long-term investors revel in stock market corrections simply because they can purchase stocks at lower rates (‘discounted’) and they don’t mind holding on to them for a long duration. When the total share markets plunge, individual share prices tend to as well. This is a boon to the long-haul investor.
6. Short-lived -
Corrections don’t last for long. The consensus on this is quite clear that they may last, at the most, for a little more than a year. Of course, this makes a difference to any investor as months of hard work can just turn redundant in a matter of a day, but looking at the larger view, the stock market highs are higher than correction lows.
7. Dividends -
When you buy shares online, you should know that, from a historical perspective, growth stocks lead the stock market to reach heights in an overall way. However, income or dividend stocks can offer a more stable investment. These come from firm-footed companies and give you guaranteed dividends. They become profitable over several years. If you invest in ‘dividend stocks’ you may still see returns that won’t affect you should a correction occur.
8. No Cause for Panic -
In the long run, a correction here, and one there, does not matter much. In a general way, the market always tends to rise.
When you open a Demat account, you should not worry over a correction. Many investors do and this prevents them from a healthy view to investment and portfolio diversification. At Motilal Oswal, you can learn and earn and let the super broker help you to invest wisely.
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