What's the Difference Between Market Pullbacks and Corrections?

Author:
Publish date:
Video Duration:
1:46

The difference between the two is that a correction is of a larger magnitude than a pullback is.

Before we get into this, let’s just start by saying that a lot of movements in the stock market can be exaggerated, or excessive.

When times are good, stocks can rise too much in a given period — too much relative to the earnings potential of their companies. When times are not so good, sometimes stock prices fall lower than their ‘intrinsic’ value, which isn’t so easy to discern, although that is the job of the investor.

The public market for equities is comprised of tons and tons of funds and people and actors, with varying viewpoints, creating volatility. There’s also heard mentality sometimes, another factor creating wild swings.

In private transactions, where one or a few buyers are interested in buying a large stake in a company, the process is much more measured and the change of price of the target company throughout the negotiation is much more range bound.

So we have pullbacks in public markets.

Sometimes, the market gets overextended. That doesn’t means stocks can’t keep rising. It just means they ned to fall before they can resume rising.

A correction is technically a 10% drop in stock prices from recent all-time highs.

A pullback is a smaller price drop.

There's a bit more to this, so to see what that is, watch the quick video above. 

Catch up on the Latest Webinars on TheStreet!