The declines in the prices of global stocks that have been witnessed in the recent past have seen some technical terms being bandied about making it necessary for investors to take a refresher course on some of them.
One of the terms that has seen wide use in the recent past is ‘correction’. This is a phenomenon that occurs when an asset such as index, commodity, bond or stock declines in value by at least 10% from a previous high. A recent example of this is when the Dow Jones industrial average declined by 10% a few weeks back from the 26,616.71 points it had reached on January 26, 2018.
The common practice among market watchers is to wait until the close of the market before declaring that an asset has formally entered a correction (such as during a stock market holiday. And so far there have been no indications that the Nasdaq, S&P 500 and the Dow have entered this phase.
During bull markets corrections are common. In recent history there was one that ended two years ago in February per the S&P Dow Jones Indices. This means that the market has gone for a long time without having undergone a correction.
When stock indexes rise by 20% or more the situation is referred to as a bull market. According to experts the current bull market dates back to March 2009 when stocks started a recovery following the steep declines that had been witnessed during the global financial crisis. Since then the Standard & Poors 500 index has more tripled in value.
A bear market on the other hand occurs when the prices of stocks fall by 20% or more over a certain period. There was a bear market that started in October 2007 before ending in March 2009 following the bursting of the housing bubble.
Sometimes sell-offs in one market leads to sell-offs in other markets. This is referred to as a contagion since market disturbances have spread from one region or economy to others. Recently stocks in the United States witnessed a sell-off which as replicated in other markets in Europe and Asia and this was a good example of a contagion.
Another financial term that has been gaining frequent use is algorithmic trading. The term is of course borrowed from algorithms and it refers to placing of trades by computers which have been programmed to do so. These computers are faster than humans and they can trade more frequently. Recently there was a sudden plunge when U.S. markets opened after a long weekend. This was blamed on algorithmic trading.