A stock market correction is generally defined as a decline of 10% or more from a recent market high. Although a double-digit drop can feel dramatic, corrections are a normal part of investing and can occur even during long-running bull markets.
According to FINRA, a correction typically refers to a decline of at least 10% from a previous peak. Unlike a market crash, however, a correction does not necessarily signal a financial crisis or prolonged economic downturn.
The difference between a correction, crash and bear market comes down mainly to the size, speed and circumstances of the decline.
Stock Market Correction vs Crash
A correction usually develops over several days, weeks or months. Investors may begin selling because stocks have become expensive, interest rates are rising, corporate earnings are disappointing or economic growth appears to be weakening.
A market crash is typically much faster and more disorderly.
There is no official percentage decline that defines a crash. Instead, the term generally describes an unusually rapid sell-off driven by panic, financial stress or an unexpected event.
For example, the 1987 Black Monday crash saw the Dow Jones Industrial Average lose more than 22% in a single session. During the early stages of the COVID-19 pandemic in 2020, U.S. stocks also experienced several exceptionally sharp daily declines.
Modern U.S. markets have safeguards designed to slow extreme moves. Market-wide circuit breakers can temporarily halt trading when the S&P 500 falls 7%, 13% or 20% from the previous day's closing level.
| Market Event | Typical Definition |
|---|---|
| Correction | Around 10% decline from a recent high |
| Bear Market | Around 20% or more below a recent high |
| Crash | Sudden, unusually severe market decline |
Why Do Stock Market Corrections Happen?
Corrections can have many causes.
One common trigger is valuation. When stock prices rise much faster than company earnings, investors may decide shares have become too expensive and begin taking profits.
Interest rates can also play an important role. Higher rates increase borrowing costs and can make bonds more attractive compared with stocks, putting pressure on equity valuations.
Other potential triggers include weak economic data, disappointing corporate earnings, geopolitical tensions, changes in government policy and unexpected financial shocks.
Sometimes, however, there is no obvious single catalyst. Markets simply move through periods when investors reassess risk after a strong rally.
Does a Correction Mean a Bear Market Is Coming?
Not necessarily.
A 10% decline can eventually become a bear market, but many corrections end without developing into one.
That is what makes the distinction difficult in real time. Investors only know afterward whether a decline was a temporary correction or the beginning of a deeper downturn.
A bear market is generally considered to begin when a major market index falls at least 20% from its recent peak. Bear markets also tend to last longer and are more frequently associated with recessions, deteriorating earnings or broader financial stress.
