One of the first options that pop up in people’s heads when they hear the word investment is the stock market. But not many people venture into it as they have preconceived notions about it. This is because there are many stories about people losing money in the stock market. These stories are not false at all. However, there are many ways in which you can start investing without losing large amounts of money. You can use some of the best micro investing apps available in the market to start your investing career. These apps will allow you to gain investing experience by investing small amounts of money.
However, there are a few things you should definitely know about when you are thinking of investing in the stock market. After all, it is a bit risky as the market is very volatile. One thing that many people don’t know about the stock market is a stock market correction. This article is completely about the stock market correction and the things you don’t know about it.
What is a stock market correction?
A stock market correction is when a market index or security drops at least 10% or more after experiencing growth is called a stock market correction. When this happens most of the investors go into a panic mode as they see their portfolios declining. There are plenty of reasons for a stock market correction. It can happen due to management problems in a company, due to a macroeconomic shift or several other reasons. Charting methods are used by analysts, investors, and traders to predict a stock market correction. But what many people don’t understand is that stock market correction is a natural phenomenon. It can last for weeks, months, or more. You will see the price of the stocks rising after a period of time.
Here are some things you probably don’t know about a stock market correction.
Stock market corrections don’t last long
It is frightening to see the value of your stocks drop. But what you don’t about the stock market correction is that it doesn’t last long. Most of the time these stock market corrections don’t even last for more than three months. You may experience temporary loss during these periods but keep in mind that they are temporary and the market will stabilize.
Stock market corrections are frequent
This is something that people do not know. The stock market corrections are very common and they occur very frequently. They occur due to the rising and falling of markets and there is nothing to worry about. There have been many instances when the market experienced back to back corrections. But as you can see, those stock market corrections do not affect the current market.
Stock market corrections recover quickly
It will take at least four months for the corrections to hit their absolute low. But after that, the tides shift and the market starts to recover. Once it starts recovering it will take the same amount of time or even less time to completely recover.
They occur due to emotional decisions
After several years of studies and observations, it was found out that corrections occur due to the decisions made by the investors. They happen because investors tend to keep buying or selling shares rapidly. This would not happen if they buy the shares and hold onto them for long periods. The prices of stock fall when investors try to sell their stocks as soon as possible when the prices are high.
You cannot predict a stock market correction
No matter how experienced you are in investing you cannot predict a stock market correction. It is a known fact that the stock market corrections happen every 1.9 years on average but predicting the exact time is almost impossible. There are plenty of analysts who predict that a correction will happen at a particular time but most of those predictions do not come true.
The causes of correction can only be known after it is hit
There are many reasons for the decline of the stock market but the exact reason cannot be known before the correction happens. It can happen due to the investor’s fear of experiencing losses, the response of investors during the rise, or even because of the weakening economy of a country. Sometimes you can predict it by observing economical and political conditions. However, it is very difficult to speculate the exact reason as there are too many components that can cause it.
It is a great time to invest when the stock market drops
Believe it or not, a stock market correction is the best time to invest in stocks. The main reason is that the prices of stocks are at their lowest. So you can buy your desired stocks for cheaper prices. The stock market correction only lasts for a short period of time after that they start to rise again. During this period you can sell your stocks for higher rates. This is not an assumption but a fact as it happens after every stock market correction.
No need to worry about dividends stocks
If you are someone who owns high dividend stocks then there is no need to worry. The high dividend stocks are the ones that also offer high returns. These stocks perform the best during the stock market correction. This is because stocks like these tend to lose their worth slowly.
They don’t matter in the long run
A stock market correction is just like a speed breaker in your career in the stock market if you look at the long term. A stock market correction does not affect someone who is a long term investor. Losses are only experienced by the ones who are short term investors. Long term investors use this as an opportunity to reassess their portfolio.
Stocks rise dramatically after the correction ends
The stocks rose by 69% the following year after the S&P 500 hit a low point in March 2009. This is not just a one-time thing. Even the bear markets rose by 32% after a stock market correction. So it is better to hold on your stocks for a long time. Let the market hit rock bottom and see the prices rise again. You have to sell your stocks in the first two months after the stock market correction as you can make most returns during this time.
The bottom line is don’t worry about the corrections as they are just s part of investing in the stock market. A stock market correction will not affect you if you hold onto your stocks for a long time. Read some of the best investing books available in the market to know about these kinds of things. A stock correction does not last long so just be patient.