Correction

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: Correction is a decline of at least 10% but less than 20% in a stock, index or other asset from its most recent peak. Corrections are common, typically shorter than bear markets, and often interrupt a longer-term uptrend.

How a market correction works

Markets rarely rise in a straight line. After a strong advance, prices may run ahead of fundamentals, and a shift in sentiment, earnings disappointments, rising interest rates or unexpected news can trigger selling. Once a drop reaches 10% from the high, it is commonly labeled a correction. If losses reach 20%, the move is generally called a bear market. Smaller dips of a few percent are usually described as a pullback.

Correction example

Suppose a stock index peaks at 5,000 points. Over the next five weeks it falls to 4,400, a 12% decline, so it is in correction territory. If it then rebounds to 4,800, the low of 4,400 marks the bottom of the correction. Had it kept falling to 3,950, a 21% drop from the peak, the decline would meet the common definition of a bear market. The same thresholds apply to an individual stock measured from its own high.

Correction vs pullback vs bear market

  • Pullback: a modest dip, often 5% to 10%, within a trend.
  • Correction: 10% to 20% from the peak.
  • Bear market: 20% or more, often lasting months and associated with a recession or tightening financial conditions.

These cutoffs are conventions used by the media and analysts rather than formal rules.

How investors respond to corrections

Long-term investors often review their portfolio allocation instead of reacting emotionally. Some rebalance by adding to stocks that have fallen below their target weight. Traders watch whether the market holds a key support level and whether selling volume dries up, signs that the decline may be ending. Others reduce exposure if they believe a correction could deepen.

Corrections in individual stocks are even more frequent than in broad indexes, because single companies react to their own news such as guidance cuts or management changes. A stock can fall into correction territory while the overall market is calm. Checking whether a decline is market-wide, sector-specific or company-specific helps an investor decide whether the original reason for owning the stock still holds. Reviewing recent earnings reports, guidance and analyst commentary can clarify what changed.

Risks during a correction

No one knows in advance whether a 10% decline will stop there or extend further. Buying too early, using heavy margin or selling at the low out of fear can all lock in losses. Volatility usually rises during corrections, so position sizes that felt comfortable may feel too large. Having a plan before the decline arrives helps.

Frequently asked questions

How often do stock market corrections happen?

Corrections have historically been fairly common, occurring every year or two on average over long periods, though their timing is irregular and unpredictable.

What is the difference between a correction and a crash?

A correction is a 10% to 20% decline that may unfold over weeks. A crash is a sudden, very steep drop, often over just a few days.

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For information only, not investment advice. See the disclaimer.