- April 17, 2019
- Posted by: InvestzaCapital
- Category: Personal Finance, Wealth Protection
A lot of investors or even mere spectators of the market activities often misunderstand the difference between a bear market and a market correction. Because of this misunderstanding it becomes difficult to judge what your next step should be and what to expect form the market in the near future. With this blog we hope to provide you with a little clarity on the difference between the two and also understand which of the two might actually be good for you.
What Is a Bear Market?
During bear market periods, investing can be risky even for the most seasoned of investors. A bear market is a period marked with falling stock prices. In a bear market, investor confidence is extremely low. Many investors opt to sell off their stocks during a bear market for fear of further losses, thus fuelling a vicious cycle of negativity. Although the financial implications of bear markets can vary, typically, bear markets are marked by a 20% downturn or more in stock prices over at least a two-month time frame.
Bear markets typically begin when investor confidence begins to wane following a period of more favourable stock prices. As investors grow increasingly pessimistic about the state of the market, they tend to sell off their investments in order to avoid losing money from the falling stock prices they anticipate. This behaviour can cause widespread panic, and when it does, stock prices can plummet. When this happens, trading activity tends to decrease, as do dividend yields. At some point during a bear market, investors will typically try to capitalise on low stock prices by reinvesting in the market. As trading activity increases and investor confidence begins to grow, a bear market can eventually transition to a bull market.
What is Correction?
A correction is generally defined as a 10% or greater decline in the price of a security from its most recent peak. Corrections can occur in individual stocks, indexes, commodities, currencies or any asset that is traded on an exchange. An asset, index, or market may fall into a correction either briefly or for sustained periods of time, including days, weeks, months, or even longer.
Prior to a market correction, individual stocks may still be strong, or even over-performing. Conversely, during a correction period, individual assets frequently perform poorly due to adverse market conditions. Corrections are often seen as ideal times to buy high-value assets at discounted prices for investors with available capital who are willing to take the risks involved.
The average market correction is short-lived and lasts anywhere between three and four months. While this may not seem like a long time in the grand scheme of things, it is easy to see why casual investors may be worried by a 10% or greater downward adjustment to their assets during this period, especially if they are new to investing or it is the first correction they have experienced.
Bear market versus market correction
Market correction is a period in which stock prices drop following a period of higher prices. The idea behind a correction is that because prices rose higher than they should have, falling prices serve the purpose of “correcting” the situation. One major difference between a bear market and a market correction is the extent to which prices fall. Bear markets occur when stock prices drop 20% or more, whereas corrections typically involve price drops around 10%. Furthermore, market corrections tend to last less than two months, whereas bear markets last two months or longer.