Stock market correction pros and cons

It is reverse movement, usually downward, in the price of an individual stock, bond, commodity, or index. If prices has been rising on the market as a whole, and then falls dramatically, this is known as a correction. As long as you see the patterns acting as continuation patterns, the overall health of the market is strong. Failures by continuation pattern can forewarn of a more substantial market correction on the horizon.

“A relatively short-term drop in stock market prices, generally viewed as bringing overpriced stocks back to a level closer to companies’ actual values.”

When prices fall too fast, a market often retraces part of the trend move. often the degree of retracement is measured utilizing a Fibonacci ratio . Recently, our markets witnessed a drastic fall, owing to the pull out of the foreign institutional investors (FII). The recent Mumbai blasts have also affected it.

The investors in these markets form consortiums among themselves such that, a group of these investors are able to make changes in the overall market indices. FII’s are one such group. When they think, the time has come to book profits; they take up a selling position. This causes the market to fall and when the market falls, these groups again buy the shares; thus making profits again out of their buying back the shares.

This phenomenon is possible only if the group’s transactions can exercise a considerable influence in the concerned market.

Market sentiments play an increasingly important role in the fixing of share prices. News such as decrease in interest rates, good rainfall, etc promotes investment thereby raising the price of the indices in the process. But bad news such as a bomb blast or an earthquake quake the investors see, thereby lowering the indices.

Advantages for those:

• Who invest conservatively, to the exclusion of stocks whose performance depends on the successful execution of a very aggressive growth strategy.

• Who invest primarily in stocks that are not dependent on the American Stock market.

• Who focus on rapidly growing industries and industries benefited by long term shifts in global economics.

• Convertible preference shares could be the right investment for protection against potential market correction

Markets go up and they go down, they have to, in fact. Because if shares rose in a straight line then everyone would put their savings in the stock market...and that would mean no opportunity for shrewd investors to get in ahead of the crowd. Those who have the nerve to invest in shares are rewarded for our daring that must mean volatility and short-term losses even on the strongest positions, so the investor must react with the same equanimity to any move in the broader stock market index, whether it goes up or down

Disadvantages over ordinary shares:

1. Limited exposure to capital growth.

2. Often do not hold right to vote.

Over Fixed Interest Investments:

1. Relatively less attractive in a rising interest rate environment.

2. Not completely sheltered from market volatility.

3. Higher risk.

4. Extensive conditions can be complicated.

5. Payment of brokerage and stamp duty.