A correction is a reversal in a stock, bond, commodity or index of 10% or more. This reversal usually takes the form of a negative movement preceded by an upward trend. The correction occurs because stocks are overvalued, and eventually investors cash in and sell stock until the price returns to a realistic value. Corrections are usually short in duration, but can precede a bear market or even a recession.
Corrections are fairly common occurrences, occurring in the market as a whole about once each year. They can even be healthy for the economy as they prevent bubbles caused by irrational exuberance. A correction in one major stock index generally means a correction in other major stock indices will likely follow. For instance, a correction in the UK’s FTSE may mean that a correction in the S&P 500 is soon to follow. However, just because the market as a whole experiences a correction does not mean every individual stock in that index experiences correction: a stock’s price may continue to rise, remain steady, or experience a sharper downturn than the rest of the market.