Market Correction – How It Impacts Your Stock Investment

Market correction may result in short-term damages but is a positive event in the long run.


As a new retail investor in the stock market, it’s important to understand the fluctuations that occur regularly in the market like corrections and retractions. These events are best analysed graphically through charts and trends since they give you a bird’s eye view of the sudden changes in stock prices.

Chart representation of stocks

Chart representation is a crucial part of stock market trading. This is because a visual representation will give you an accurate picture of various stock performances. Chart representation of stocks is necessary for technical analysis since it keeps you informed about the most opportune time for investing in a stock. From beginners to stock market pros, analysing stock charts is important for decision making. By analysing chart representation of stocks, you will be able to understand the ‘pulse’ or the ‘health’ of the market. And you will obtain a glimpse of what’s currently happening for various stocks.

What is Market correction?

Market correction is an event wherein the nominal price of a stock or commodity undergoes a sudden change and achieves a new equilibrium price. In simple terms, a stock that’s rapidly going up cannot keep going up forever. Suppose a stock price or index is moving upwards, when it reaches a certain level, it undergoes a sudden change by a specific percentage. Market correction is essentially a decline or decrease by at least 10% in the price of a security, asset, or stock. A market correction is a brief event that may last between a few days or months. 

A simple example

To understand what a stock market correction is, let’s elaborate with a simple example. Let’s pick the stock of Infosys denoted by INFY. If the price of INFY is at INR 100 for a given time and it went up to INR 1000. Now consider that the price suddenly came back to INR 500. This event is called a correction for the stock of Infosys. 

Graphical representation of market correction

market correction

 

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Market correction is essentially a decline or decrease by at least 10% in the price of a security, asset, or stock.

What does correction indicate for a stock?

A market correction may seem like a decline in the stock value. Also, it’s true that it’s short-term damage. However, a market correction is actually a positive event where overvalued asset prices are adjusted and buying opportunities are created for investors. Correction in a stock will affect your investment if you perform short-term trading. But for long-term traders, any damage from a correction makes little to no difference on their returns. 

Market correction insights – How your stock investment is impacted.

Here are some of the key indications that a correction provides:

  • When a correction occurs, it indicates an opportune time to invest in a high-valued stock. 
  • You can expect a substantial bargain while purchasing a high valued stock during a correction.
  • A correction indicates upcoming potential for high ROI (return on investment) for a stock when compared to a steady market. 
  • If you are in it for the long-term, you can enjoy capital gains by adding stocks to your portfolio during a correction. 

Market corrections usually occur due to environmental factors and market conditions. For instance, Covid happened to be a major correction in the stock market. In fact, Covid has been an opportunity for most companies. Corrections aren’t always negative and most often they reflect the long-term value of a particular stock. 

Anju Nambiar
Anju Nambiar
Anju has 5 years of experience covering business. She writes on startups, business life cycle and startup ecosystem. Her stints include Amazon and Adjetter Media Network.

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