A market correction and a market crash both involve declines in the market, but they differ significantly in scale and impact:

Market Correction:

Definition: A market correction is typically a decline of 10% to 20% from a recent peak in stock prices. Corrections can occur due to a variety of factors, including changes in economic conditions, shifts in investor sentiment, or external events.

They are a natural part of market cycles and can help to bring overvalued assets back to more reasonable levels. While they can be unsettling, corrections can also create opportunities for investors to buy stocks at lower prices.

Duration: Corrections are usually short-term, lasting weeks to a few months.

Frequency: They are relatively common and occur periodically as part of normal market fluctuations.

Impact: Corrections often represent a natural adjustment and can lead to opportunities for investors. They don’t generally indicate fundamental economic problems.

Causes: Corrections might be triggered by changes in economic conditions, shifts in investor sentiment, or minor disruptions.

Aftermath: Markets typically recover from corrections, often continuing the long-term upward trend. The recovery period is usually shorter and less dramatic compared to the recovery from a market crash.

Market Crash:

Definition: A market crash is a sudden, severe, and often unexpected drop in stock prices, usually defined as a decline of 20% or more.

Duration: Crashes can be rapid and dramatic, but their duration can vary. Recovery might take months or even years.

Frequency: Crashes are less common and often result from extreme economic, financial, or geopolitical factors.

Impact: Crashes can lead to significant economic disruption and investor panic. They often require more substantial recovery measures and can signal deeper underlying issues in the economy or financial system.

Causes: Crashes are usually caused by more severe factors such as economic crises, financial panic, systemic failures, or major geopolitical events.

Aftermath: The immediate aftermath of a crash can include heightened volatility, reduced investor confidence, and potential economic slowdowns or recessions. Recovery from a crash can be slow and might involve significant adjustments in financial markets and economic policies.

In summary, while both involve declines in market prices, a correction is a normal and relatively minor adjustment, whereas a crash is a severe and sudden drop with potentially more serious implications.

Lauren Hua is a private client adviser at Fairmont Equities.

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