Correction

What Is a Correction?

A correction is a drop of 10% or more from a recent high in the price of a stock, a market index, or another asset. The 10% threshold is a widely used convention rather than a formal rule. It is measured from the most recent peak to the lowest point reached before prices recover. Corrections are a common part of market behavior. They are often described as a healthy reset after a period of strong gains in a bull market, though they can also be the early stage of a larger decline.

How Corrections Are Measured

The size of a correction is the percentage change from the peak price to the trough price:

Change (%) = (Trough Price − Peak Price) ÷ Peak Price × 100

For example, if an index closes at a high of 1,000 points and later falls to 900 points, the result is −10%. The minus sign shows a decline, so the index is in correction territory. Investors usually refer to the size of the drop without the minus sign.

Corrections and Bear Markets

Corrections are often compared with a bear market, which is generally defined as a decline of 20% or more from a recent high. A correction is usually shallower, and many corrections never develop into a bear market. Some recover within a few weeks, while others deepen or last for months. No correction's length or outcome can be known in advance.

Why Corrections Matter to Investors

Corrections can be triggered by volatility spikes, rising interest rates, weaker economic data, or shifts in investor sentiment. They show that prices can fall significantly even during long-term uptrends. Understanding a drawdown, which is the decline from any peak to a later low, helps put a correction in context. Because a drop that looks severe on paper can matter differently depending on when money is needed, many investors consider their time horizon and diversification when thinking about corrections. This entry is for general education and is not a signal to buy or sell.