A Market correction is done when the market falls or entries in bear territory. So What is a Stock Market Correction & Why does stock market correction occur? Let’s understand…
It is done due to the company’s decrease in earnings, political instability, trade war & tariffs, pandemic situation, and economic downturn.
According to Warren Buffet:
Be greedy, when others are fearful.
Be fearless, when others are greedy.
In What is a Stock Market Correction article, you’ll learn when to be greedy and when to be fearful. So Let’s begin with What is a Stock Market Correction?
What is a Stock Market Correction?
A Stock Market correction is a 10% decline in the price of an individual stock or index from its 52-week high.
Just when you see a 10% decline in stock after 1 year high, it means that stock market correction is being done on it.
It indicates that investors are losing faith in the market. It becomes an intimidating situation for traders or investors.
Market correction provides you with an opportunity to buy a stock at a low price and sell it at a high price.
Better stock purchases can be analyzed by the company’s P/E ratio, P/B ratio, EPS, and debt-to-equity.
Must Read: How to make money from the Stock Market : Unique Way
When does Stock Market Correction occur?
When the market falls or enters a bear trend, then the situation in the market gets very tense.
Many stocks fall really down from their real values.
This is the time to be greedy because value stock will reach its instinct value soon.
For example,
ABC car company’s car had a value of Rs. 8 lacks till last quarter. But in this quarter, its value has become Rs. 6 lakhs. It is because there is a slowdown in the economy.
The company thinks of lowering the car’s price to increase its sales. But the car is still very popular among the public.
If you’re an investor, you’ll understand that it’s a profitable situation for you as you’re getting a car worth Rs. 8 lakhs.
The Car might look undervalued right now but it is originally of a higher price and it is beneficial for you at this time.
Since people like this car, there is also a probability that it will return to its original price soon.
Just like this, you must be careful when others are being greedy because when the market rises, it enters the bull trend and becomes an opportunity for investors to make money.
In this situation, the investors are ready to buy the stock at higher rates. So stock can increase constantly in this situation.
This is the time for you to act carefully and avoid investing in these stocks.
For example,
XYZ company has launched a new car in the market and there is a lot of excitement about it. The market value of the car is Rs. 12 lacs. You might buy the car immediately without thinking if it’s worth the price.
Soon, after customer feedback, the price of the car decreased to Rs. 10 lacs as people didn’t like it much.
It will make you regret it because you paid the higher price of a car just because of market excitement.
This is an important lesson that you must learn. There will be many incidents when a stock’s price would increase rapidly but you must analyse if it’s worth the price.
Now you must have understood what is a stock market correction. Let’s understand why this is happening…
Must Read: When and How to enter the Stock Market?
Why does Market correction occur?
- Many times, a company’s earnings decrease and it becomes a reason for a market correction in stock values.
- Political instability can also be an important factor in a market correction. Trade war & tariffs.’
- Pandemic situations like corona, tsunamis, earthquakes, etc create a state of panic in the market.
- An economic downturn after a frightful situation like corona can also lead to a market correction.
How to identify opportunities in Market Correction?
Market Correction provides you with an opportunity to buy a stock at a low price and sell it at a high price. But it depends on you how much you can utilize this situation.
You must always try to look for positive elements during a market correction. You can make profits in both the bear and bull markets. You just need to think calmly and use good strategy.
How to Analyse Better Stock Purchases?
There are many tools that you can use to analyze better stock purchases.
Some long-term investors give importance to fundamental analysis, while traders give importance to technical analysis.
It depends on you to choose your type of investment. But If you are a new investor, You must look at the fundamentals of a company because it is considered as the best tried – and – tested tool.
For fundamentals analysis, you must focus on:
Price to Earning Ratio (P/E Ratio) :- P/E Ratio determines how much the market can pay depending on the company’s past and future earnings.
High P/E determines overvalued stocks.
Low P/E determines undervalued stocks.
Price to Book Value (P/B Ratio):- The P/B Ratio of the company’s money after selling business and assets is its book value.
Earning per Share (EPS Ratio):- EPS Ratio determines the company’s profitability.
Debt to Equity Ratio:- Debt to Equity Ratio determines if the company has more assets or liabilities.
Debt to Equity = Total Liabilities / Shareholder Equity
If the debt to-equity ratio is high, you must avoid buying their shares because it means that the company has more debts and the chances of you losing your money are high.
Conclusion
- Look for Opportunities when others are scared and be careful when everyone is jumping on a single opportunity.
- Find a suitable opportunity during market correction and use an average down strategy after analyzing for profits.
- Analyze the company’s P/E Ratio, P/B Ratio, EPS Ratio, and Debt to Equity Ratio for better stock purchase.
- I hope you understood What is a Stock Market Correction and Why does stock market correction occur?
