Q&A: What a stock market 'correction' means to you

AP News
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Posted: Aug 21, 2015 5:56 PM
Q&A: What a stock market 'correction' means to you

NEW YORK (AP) — The stock market's steep decline this week has pushed the Dow Jones industrial average into what is known as "correction" territory.

Here are some common questions asked about corrections and what they mean to average investors:

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WHAT IS A STOCK MARKET CORRECTION?

A "correction" is a Wall Street term for when an index like the Dow industrials or the Nasdaq — or an individual stock — falls 10 percent from its most-recent high. The Dow lost 530.94 points Friday and closed at 16,459, which is 10.1 percent below its record close of 18,312 set on May 19. A correction is not the same as a bear market, which is defined as when a stock index or individual stock falls 20 percent from its most-recent peak.

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IS THE ENTIRE STOCK MARKET IN A CORRECTION?

No. In fact, the Standard & Poor's 500 index, considered a far broader gauge of the U.S. stock market's health, is down 7.5 percent from its most-recent high. The Nasdaq is precariously close to being in a correction, down 9.8 percent from its most-recent high, but that is not by definition a correction.

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WHEN WAS THE LAST TIME WE HAD A CORRECTION?

The U.S. stock market entered into its last correction in October 2011, but the market's downturn started in late July 2011. That correction was caused by a combination of factors, one being the U.S. government near breach of its debt ceiling and subsequent credit downgrade from Standard & Poor's, as well as fears about Greece's financial condition.

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ARE CORRECTIONS A NORMAL THING FOR THE MARKET?

Stock market corrections have historically happened every 18 months. The fact that the U.S. market went nearly four years without one is historically unusual — it is the third-longest such streak in the last 50 years, according to JPMorgan Asset Management. Even the most bullish of market strategists will say a correction is ultimately healthy for a market because it removes some of the froth and speculation.