Q. Why is it called a correction when stock markets go down?
A.
In many ways stock markets react very much like you and I. We make most of our decisions based upon two things: our personal history and feelings – called experience; and extrapolating this “experience” to create an expectation.
When our outcome proves to be different from our expectations we usually take some kind of action to mitigate the effects of our past decisions. For example, when we go to the grocery store, and are surprised to find that oranges have doubled in price, we may buy more apples instead.
The stock market does much the same thing. When current results or information are different from what was originally expected, new decisions, in the form of buying or selling take place.
In fact, market variations within ten percent (up or down) are seen as normal in a typical business cycle. This is because new information about specific companies, industries in general and / or the overall economy is continually unfolding.
These fluctuations, whether to a particular stock, industry or the market as a whole are called “corrections.” Although we often hear the term correction to describe the stock market going down, there are both upside corrections and downside corrections. So a correction purely defined is a reversal of the current trend. And a trend can be up and down.
A correction is often considered beneficial for the long term health of the market, in that stock prices had risen too quickly and the drop put them back to more realistic levels where investors again see attractive value.
Bruce Gabel, CIM
Financial Advisor
Bruce Gabel is a Financial Advisor with Burgeonvest Bick Securities Limited and is located in our Ancaster office.
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