A market correction is a downward movement in the price of a share to adjust or ‘correct’ for overvaluation in the market. A correction manages to thwart a continued upward trend.
The market correction can last for up to two months and can come to an end when a share ‘bottoms-out’ or reaches a significant all-time low (e.g. 1 year low). At this time, investors may start buying again, thus halting the continued downward movement.
Market corrections occur when share prices continue to rise and more investors pile in. The share becomes ‘overbought’, thus driving the price up. However, there will come a time when existing investors will sell their shareholding to benefit from the peak caused by the influx of investors, and an underlying belief that the prospects of the company may not be quite so positive. This in turn can reverse the buying trend, making more shares available in the market and thus commence a market correction.