correction
A decline of 10% or more in the price of a security or market index from its most recent peak, typically short-lived and considered normal.
Example
“After a 15% correction in October, the market quickly recovered and hit new highs by year-end.”
Memory Tip
A correction 'corrects' prices that went too high — a 10-20% dip.
Why It Matters
Understanding market corrections helps you avoid panic selling during normal market downturns. If you recognize that a 10-15% decline is a typical part of investing, you are less likely to make emotional decisions that lock in losses and derail your long-term financial goals.
Common Misconception
Many people mistakenly believe that a correction signals the start of a major crash or bear market. In reality, corrections are common, temporary pullbacks that happen frequently and typically resolve within weeks or months without turning into prolonged downturns.
In Practice
In January 2022, the S&P 500 dropped approximately 10% from its peak in early January, meeting the technical definition of a correction. An investor with a diversified portfolio who stayed invested during this period saw the index recover and reach new highs by mid-year, whereas someone who sold in panic would have missed the subsequent gains.
Etymology
From Latin 'correctio' — to 'correct' an overpriced market back toward fair value.
Common Misspellings
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Related Terms
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