Investing in Philippines: Investing word of the day: Correction

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Wednesday, August 25, 2010

Investing word of the day: Correction

source: http://seekingalpha.com

We have seen this lately in the local stock market after the DOW went to the red. Also due to the three or four days that the PSE defied DOW thus this week it is expected to slow down after a great uptrend for the past days, so what then is correction or market correction?

As usual I got this definition from Investopedia.com:

"A decrease in the market price of an asset or entire market after extensive price increases. A technical correction occurs even when there is no evidence that the increasing price trend should cease. It is often caused when investors temporarily slow down their purchases of securities, which commonly leads to a pullback toward a short-term support level."

Layman's explanation:

It is a decrease of the market after a extended uptrend.  Generally when the market has enjoyed a continuous increase in price it will come to the point where it is at its highest point thus it will start to pull back. An analogy used by most is the bouncing ball analogy. Just like the bouncing ball, stock market is not always in an uptrend mode at any point it will go down and it will bounce back again.  

That is why it is important to learn how to time the market. When prices are down it is the best to buy because sooner or later it will bounce back or it may even surpass the previous highs. In relation to the Law of supply and demand when the stock market becomes saturated meaning either the buys or sells is more than the other it will surely create a change. When prices are rising sellers dominate the market because everyone wants to profit and when it is a downtrend buyers dominates it because it is a bargain market. 

The stock market is any ordinary market that we know. It is always buy low sell high. You don't sell at below cost if you are in your sane mind, you are trading for profit. Correction is that time when as Investopedia.com says there is no apparent reason for prices to go down its just that prices are to high and in order to sell prices should be lowered to attract buyers.

So bargain hunters lets go shopping!

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Chitika