Corrections sound scary, but they are a normal part of investing in stocks. Knowing what they are, and what history says about them, can help you stay calm when one arrives.
What is a stock market correction?
A stock market correction is a decline of at least 10% from a recent high in a stock index such as the S&P 500 or the Nasdaq Composite. There is no official definition, but 10% is the widely used line. A drop of 20% or more is usually called a bear market instead.
Fidelity describes it this way: "While there is no official definition, a stock market correction is generally considered a drop of at least 10% from recent market highs." The measurement starts from the highest closing level the index reached before the decline. If the S&P 500 peaks at 6,000 and later closes at 5,400, it is down 10% and in correction territory.
Corrections can hit a single stock, a sector or the whole market. When people say "the market is in a correction," they usually mean a major index, most often the S&P 500, which tracks about 500 large U.S. companies. A correction in one index doesn't always mean a correction in another. Because the Nasdaq Composite is heavier in technology stocks, it can fall into a correction while the broader S&P 500 holds up better. Our explainer on the Dow, the S&P 500 and the Nasdaq shows why the indexes can move so differently.
Pullback, correction, bear market or crash: what's the difference?
These words describe declines of different sizes and speeds, and it helps to keep them straight.
A pullback is a smaller dip, commonly described as 5% to 10% from a recent high. Pullbacks are so common that many investors barely notice them.
A correction is a decline of 10% to just under 20%. It feels more serious because it erases months of gains, but it often ends without turning into something worse.
A bear market is a decline of 20% or more. Fidelity notes that bear markets tend to last longer than corrections, and they often come with bigger economic worries, such as a recession.
A crash is less about size and more about speed. Fidelity describes crashes as "faster and more severe than corrections." A crash can happen in days, while a correction may unfold over weeks or months.
These labels are only lines on a chart. A 9.8% drop and a 10.2% drop feel almost the same in your account, even though only one is technically a correction. What matters more is how a decline fits your plan and your timeline.
How often do stock market corrections happen?
More often than many people expect. According to Fidelity, since 1980 the S&P 500 has fallen 5% or more at some point in 93% of calendar years, and 10% or more in 48%…
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Content on The Evergreen Edit is for educational and informational purposes only and is not individualized financial, investment, tax or legal advice. Learn more.
Compound growth estimate
Estimated total
$17,175
Your contributions
$13,000
This is an estimate, not a prediction. Monthly compounding; taxes, fees and inflation are excluded.
This article is for educational purposes only and isn't personalized financial, tax or legal advice. Consider talking with a qualified professional about your situation.
Kiara Miller — Founder & Editor
Kiara Miller is the founder and editor of The Evergreen Edit. He has been doing independent finance research for two decades and reviews every article before it's published.
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