Sometimes stock prices stabilize and don’t
move noticeably up or down for a period of time as brief as a
few weeks or as long as several years. And sometimes prices drop
rather suddenly before they recover and begin to move higher again.
If the major market indexes drop 10%, the drop is considered a
correction.
Corrections tend to be cyclical, sometimes
occurring one a year and sometimes only once or twice in a decade.
Typically the market has rebounded relatively quickly after these
events, sometimes even regaining lost ground within a few months.
For your health
Many experts think corrections are healthy
despite the concerns you may have as an investor about losing
money when prices drop. The argument is that a correction resets
stock prices to more reasonable levels, bringing them more in
line with the company’s earnings and growth potential.
On the other hand, if prices continue to
drop, a severe correction may threaten to turn into a
bear market
unless things turn around or the
Federal Reserve
loosens the money
supply.
Tumbling down
A stock market crash is a sudden, significant collapse of stock prices, magnified by widespread selling that drives prices still lower. There have been two major crashes in the U.S. in the 20th century. Both times, the market’s value dropped more than 20% — a 23% fall over two days in 1929 and a 22.6% one-day drop in 1987.
