With the markets falling lately you may have heard the terms "correction" as well as "bear market." While the S&P 500 as of this writing is considered in correction territory, names like Apple (NASDAQ: AAPL) and Facebook (NYSE: FB) are considered to be in "bear markets." While neither of these may sound good to the novice investor, the novice investor is exactly who we are talking to today.
A correction, is a one word way to describe the general performance of a stock relative to it's highs. The term can be applied to the stock market as a whole or it can be applied to an individual stock and refers to a moment in time where one of those two have fallen 10% or more from their highs. While there are tiny variances in the definition, most agree that when a stock falls 10% or more from it's most recent high point that this is defined as a correction. As mentioned above, the S&P 500 has fallen to the 10% mark and is considered in correction mode. While the media will make a big deal of the decline, should you be worried? Think of your favorite store to shop at. If you walk into the store and they say that everything is 10% off today, would be excited to spend all the money you have available to you? Probably not. A 10% correction (or discount in a store) is certainly nice, but not a reason to call all your friends and tell them about the great deal. In the same respect, a 10% "correction" in the market or an individual stock is usually not considered a reason to panic.
A bear market is a loosely used term since it's original use was to describe the stock market as whole. Originally, investors would say that the stock market had entered a bear market when multiple indices fell 20% or more from their most recent high. For example if the S&P 500 and the Nasdaq 100 had both fallen 20% or more each then most would say the stock market is in a bear market. These days you will see the media and traders use the term bear market on individual stocks like the Apple and Facebook mentions above.
In general, the terms correction and bear market are simple ways to explain the current locations of an individual stock or the broad market relative to their recent highs. Now you have some new words to add to your investing vocabulary!