Simply put, a Stock Market Correction is when the price beats downs or pumps up itself to reach towards the true value of the Stock.
The reason for this is Markets (investors) behaviour in reaction to positive or negative news and the too much greed or fear which is prevalent in markets. We can call it as Herd Mentality too. When some investor get panicked and start selling their shares, others may also do the same leading to huge volumes of price downfall unless someone else is buying the other side at the same price. When such a movement happens across multiple underlying stocks, the corresponding index (Nifty, Sensex) gets affected.
The recent example is Adani Enterprise Stock where the Stock got very much overvalued that even the PE Ratio crossed 120. And price took a huge hit when Hidenburg’s report got released.
Similar things happen during stock manipulations. Examples include Satyam Scam and Harshad Mehta’s Manipulation of a particular Stock.
But a correction of up to 20% is very much normal. Anything beyond that could be a cause due to affects of recent earnings results, microeconomics of Industry or Macroeconomics related issues.
A stock can be corrected by more than 50% if a recession or economic crises is going on.
One must be wary of stocks which took a hit like more than 90%, well you can say the company may soon file for bankruptcy, unless they are generating enough free cashflows to keep the company afloat.
It’s often observed that, markets fall at a much higher pace but a longer time to recover.
If you’re a long term investor you don’t have to worry about the short term corrections or market fluctuations. But it is always prudent to keep an eye on one’s portfolio and adjust accordingly as per the market scenario.
