What Is a Market Correction?

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You keep hearing about when we’re going to have the next “correction" and why the stock market is “over heated.”

Let’s sort this all out.

First off, a market correction is when a stock, group of stocks, or an index’s price falls 10% from its peak.

So if one stock hits $100 a share and then falls to $90, that’s a correction. If the S&P 500 hits 3,350 (we’ll explain the points system later) and then fall to about 3,000, that would be a correction.

Don’t confused a correction with a bear market. We’ll have a separate explainer for what a bear market is.

Corrections happen when investors think stocks are overvalued.

There can be growing sense among investors that the market is too hot for a while before a correction actually happens.

But when it happens, it usually happens all at once, or over the course of just a few days or weeks.

Investors take some time to digest what they see as weaker corporate fundamentals than what is suggested in stocks prices. They also may not be ready to sell too much of their position in the market, as the market may continue slightly higher for a bit because other investors are more optimistic.

And then there’s a catalyst. 

Want to see what a catalyst could be? See the quick video above.