A market correction is a short-term drop in stock prices, which can be regional or global. Investors can sell weaker or risky stocks, buy high-quality stocks at a discount, or turn to safer asset classes like bonds.
A market correction in the financial market is when there is a pullback in stock prices, and it can be regional or global in nature. Typically, a correction is represented by a short-term drop in market prices that could be attributed to extraneous circumstances unrelated to a stock’s underlying financial conditions. During a correction, stocks typically lose 5 to 20 percent of their value in a matter of weeks or months. There is no one way for investors to correctly play a market correction, although there are certain strategies that could work if the investor is in a financial position to make changes.
During a market correction, most stocks lose value, from underperforming stocks to industry leaders that have otherwise stood the test of time. Because both groups can be battered during a short-term downturn, one way to play the markets is to sell some of the weaker names in a portfolio, stocks that didn’t perform stellar even before any correction. In addition to lackluster results, a market correction could also be a good time to unload risky stocks. A pullback in the financial markets is a good time to assess the risk/reward profile, and a market correction serves as a reminder that risky investments can be detrimental to a portfolio during certain cycles.
Because high-quality stocks are most likely to trade at a discount during a downtrend in the market, investors can take advantage of this opportunity to buy expensive stocks while they are on sale. Profits generated from the sale of weak or risky investments can be redirected to high-quality securities. As long as a company’s economic fundamentals are strong, including sales and earnings, a stock could be unduly punished during a market correction. This is because fear or some other near-term event is driving buying and selling activity, but once the dust settles, a strong company will most likely be in a position to bounce back. By investing during a downturn, investors are in place to reap the next few gains.
Investors may choose to exit the stock market when market prices become depressed. Instead of investing in stocks, they might turn to safer asset classes, such as bonds, which pay investors a fixed amount of income over a period of time. This is a good way to play the markets, as long as the bonds produce respectable returns. If, for example, interest rates on bonds are equal to or less than what a savings account yields, there is little incentive to transfer risk from stocks to bonds.
Smart Asset.
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