A correction is not a crash as per the syllabus of stock market. Crash is like a patient admitted to ICU. Correction is like a patient treated and discharged after some stitches. Let us try to understand the correction aspect by a practical example. The price of tomato has been steady during the last 2-3 months and suddenly I saw its price increase by 100%. I asked the vendor, who said, “Buy your requirements for the next week or two Sir. Tomorrow the price may be even higher. His guess was right. The price had shot up by 50% more. From Rs.10/ per kg two days ago, it has touched Rs.30/-per kg within two days. During the course of the week it touched Rs.60/- per kg. “Sir, this is marriage season. The price may be anything until the season gets over. During the entire month the price continued to wobble between Rs.50/- to Rs.60/- per kg. The marriage season over, it crashed. It was cheaper by Rs.2/- kg, now selling at Rs.8/- per kg. This is how the “tomato market” got corrected. Marriage is just one factor. The factors affecting the price of a share are many and unpredictable.
A correction may be broadly defined thus: “A reversal of the prevailing trend in price movement for a security. The term is most often used to describe a decline after a period of rising prices.” In terms of Dow Jones Industrial Average, if it declines 10% or less in a relatively short period of time, a correction is said to take place. In principle, correction isn’t always bad. It allows the stock market to breathe from the break-neck speed that it always operates. Next to correction, it may touch higher peaks. In short, a correction is said to take place when the prices of stocks are on the rising spree and then fall dramatically. Overpriced shares (due to whatever reasons) get a trimming, and they exhibit their normal selves. With such price levels, an successful-investors/”title=”investor ” >investor is able to judge, where exactly the company stands.
Some of the causes of stock market corrections are
- Sudden political uncertainties at the highest levels.
- Pull out by major players, foreign institutional investors, due to global conditions.
- Major terrorist attacks, like the one in New York or war-like situations, natural calamities like major floods, earthquakes etc.
- “Horse-trading” by the investors, including the Financial Institutions, who form consortiums for buy and sell of shares in big lots. They book profits at a pre-set timing, and this results in market fall. This indecent trick of such groups causes heavy losses to the ordinary investors.
- Market sentiments due to unspecified reasons. If some investors withdraw from a position, it sets a chain reaction. In reality, there could be no justification for such panic selling.
Investors who need not worry about stock market corrections
- Conservative investors. Short term ups and downs do not bother them, as they invest for medium term or long term.
- Who study the long-term implications of global economy and invest accordingly.
- Those who do not press the panic button and sell the shares incurring huge losses.
- Attach no importance to views of television commentators and newspaper articles.
- Trust the stock market and its intrinsic strength.
- Will not disturb the portfolio unnecessarily.
- Control over emotions with a right sense of investment deals.
- Associate with the seasoned and experienced investors.
- Familiar with the market cycles.
- Follow the real leaders of the investment world, like Warren Buffett. There could be many investment wizards in your operating area.
Finally, stay in the market. Study the corrections, but do not react. Let the storm of corrections blow over. Happy days will be ahead again!