Don’t Worry! It’s Just A Correction

Quick Read

Why do investors get so worried when the market starts to fall? Correction is a cyclic phase of the equity market which happens from time to time. There are various reasons which triggered the current market correction, but SEBI's crackdown on shell companies and the America-North Korea standoff, stand out as the key reasons. Whatever may be the reason, as a smart investor, you only stand to gain from corrections. It's a window of opportunity to build your portfolio with quality stocks which are up for the grabs at discounted rates.

Just a few weeks ago we were celebrating the new heights that the market was scaling. Nifty's journey from 8800 to 10,000 happened in just a matter of 6 months. However, since the second week of August, the market has started to take a downturn. Those who were in a euphoric mood as both Sensex and Nifty were topping their own best performances were little taken aback the sudden pull back. If we have to analyse why this happened, there are various reason to it and we will take account all of them and try to understand how long the current correction will last.

Before we get into the core of analysis, first we have to understand few basics of the stock market. The stock market is a platform for the companies to raise capital and for the investors to become a stakeholder of the companies. Thus when you buy shares of a certain company, you become a part stake holder of that company. Which, in a way, means that you are to enjoy its profits as well as bear its losses. That's equity.

What Is Correction?

The stock market is a conglomeration of many companies from various sectors. When people say that the market sentiment is positive, they simply mean that investors are willing to buy and they have a hope that they will get good returns. This collective feeling of many investors becomes market sentiment. This market sentiment is very touchy. It gets affected by any news which has even the slightest relation to businesses. For example, whenever there is any major global event like the U.S elections (The U.S plays a major role in the global businesses hence its impact is not just restricted to the U.S) the markets of the world (read investors) have certain expectations from its outcome. As every presidential candidate has its own set of policies, and they are out in public domain long before the elections, the investor community starts to favour one over other.

And if the outcome is in the favour of the investors the market rallies. However, if the result goes against them, then the market sometimes takes a steep downturn.

The U.S election is just an example, there are various reasons which have the potential to send the market upward or pull it down. From the changes in the government policies to wars, the investors across the world keep a close eye on all the happenings.

Let's take a few examples of the recent past. In November 2016, Modi Government announced demonitisation, post this announcement, the Indian market witnessed a considerable drop. Such was the impact of this move that the stocks of the major companies came down to half which subsequently triggered a panic selling. This sudden downfall in the index and stock prices is popularly known as the correction.

How To Benefit From Market Corrections?

The smart investors always know how the market functions and these are the investors who benefit the most from the movements of the market. They know that the market never goes up or down in a straight line. It forms various higher highs and lower lows on its way. The key point that you need to know is whether you are a short-term or long-term investor, the quality of the stocks you are holding is the most important things. The rest is manageable. Imagine you are holding stocks of a company of which you have no knowledge. If you don't know what the company does it will not be possible for you to trust the company wholeheartedly. On the other hand, when you trust the company, even if it goes through a lean phase, it is very likely that it will recover and give you good returns.

The Reasons For Current Market Correction

As we have discussed the question of correction at length, it's only natural that we come to the key question - what is the reason behind the present market correction? One wonders why the market, which was going through a dream run, suddenly fell by around 300 points? Post U.P election there was great positivity in the market and all the major companies had recovered from the impact of the demonetisation. As a result, FY17-18 ended on a high. Experts were already expecting a correction. In August, triggers like SEBI's crackdown on the shell companies and the U.S-North Korea stand-off culminated in bring the market down by few hundred points.

Why Experts Look Forward To The Market Corrections?

When the bull run is on, many stocks get overvalued due to the overwhelming buying frenzy. The stock being overvalued means its value gets higher than its intrinsic value. When the correction kicks in these stocks, to some extent, get back to their normal value. In the same line, some good stocks, with strong fundamentals, also go through a price correction. As a result, their valuation goes below their intrinsic value, hence, they are up for grabs at a discounted rates. This the very reason, the market experts and investors, look forward to the corrections. It gives them a perfect window to enter the market at favourable rates.

Long-Term Investors Need Not Worry

The beauty of long-term investment is that it gives you the freedom to not worry about the high and lows of your stock holding. Market highs and corrections are the distinct features of the stock market, they keep happening in a cyclic format. The idea of going long is that we have to disregard the minor hiccups that are bound to take place and look at the bigger picture.