How a stock market correction is different from a crash

Pranati Deva
Updated: 15 Dec 2021, 04:57 PM IST
TL;DR.

While crash and correction both denote fall in markets, one is sudden while the other is gradual. Let’s understand the other aspects of how these two differ

How a stock market correction is different from a crash

How a stock market correction is different from a crash

Volatility is the basic nature of stock markets. Sometimes the market rises, other times it falls. This could be confusing for investors but it's not always bad. There is a difference between a stock market crash and a stock market correction.

While a stock market crash is when the markets fall 10 percent or more in just 1 day, a stock market correction is when the equity markets fall 10 percent or more from their 52-week high gradually.

Correction

In a stock market correction, the decline is gradual over a period of time. This generally happens after the markets have been in a bull run and help consolidate the markets. It is generally considered good as it stabilizes the market before it rises again and is also seen as an opportunity for investors to accumulate value stocks at a low cost.

The correction is usually short term and the markets recover after a few days or maximum few weeks. Every year, the markets experience corrections a few times.

In case of a correction, it is important for investors to not panic and plan ahead to benefit from the correction. A diverse portfolio helps investors cap losses during a correction.

Crash

A crash, on the other hand, is a sudden decline in the stock markets which causes significant loss. When the markets tank 10 or more percent in just 1 day, it is referred to as a market crash.

Market crashes are generally a result of sudden causes like political uncertainty, financial crisis, declining economy, pandemic, etc. Something that affects not just the markets but also the businesses and economies. A number of times crashes occur globally like during the 2008 US financial crisis when all the global markets fell. A crash signals a massive loss of confidence in the economy.

Unlike a correction, a crash is not short-term. It weakens investor sentiment and markets may take years to recover from it. For example in the crash after the US financial crisis, it took the markets nearly 2 years to reach the pre-crisis level.

A crash generally leads to investors moving funds to safer assets like gold etc. Usually, markets witness a crash at least once every 5 years. It is advisable to stop trading during a crash and just hold your assets till the storm passes.

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Stock Market correction vs crash

While it may be easier for experts to predict a correction, the same is not true for a crash since it is so sudden. It creates a wide panic and massive losses in the markets.

However, one must note that sooner or later, in case of both a correction as well as a crash, the markets recover. It is always better to ride the storm than panic and sell, as per experts.

First Published: 15 Dec 2021, 04:57 PM IST
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