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

AP News
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Posted: Aug 24, 2015 5:36 PM
Q&A: What a stock market 'correction' means to you

NEW YORK (AP) — The stock market's steep decline this month has pushed the Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite 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 fell 588.40 points Monday to 15,871.35, which is 13.3 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?

For the most part, yes. The U.S. stock market's three major indexes, the Dow, S&P 500 and Nasdaq, are all in correction territory now. The S&P 500, the index that investors pay the most attention to, is in a correction, down 11.2 percent from its recent high. That's significant.

While the indexes are in correction, not every member of those indexes is in correction. In fact, even with Monday's sell-off, two members of the S&P 500 hit new highs.

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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-rating 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.