In today’s column, stockbroker Paul Bonello breaks down what market corrections are and how they are distinct from the other main form of market downturns.
Paul Bonello has served as managing director of Finco Treasury Management Ltd for the last 30 years, and is a licensed stockbroker and accountant. During his long career, he has served on the boards of several structurally important companies, including Mid-Med Bank, Air Malta, Midi plc, and lectures at the University of Malta.
The term “market correction” is used to distinguish it from the term “bear market” in relation to equity (ordinary share) issues on a stock market.
When an index for a market depreciates by more than 10 per cent from its previous highest point, that is known as a market correction, implying that the market prices are correcting themselves in the face of new events or information affecting risk and return, such as changes in interest rates or economic cycles or political events.
When the market fall exceeds 20 per cent from its previous highest point, the phenomenon is known as bear market. A bear market is naturally much more significant than the milder market correction, and is also of a longer term nature than a market correction.
A bear market typically reflects an economy that has entered into recession, although a recession is determined in a different manner, namely a second subsequent fall in Gross National Product.
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