Market correction vs bear market: What’s the difference?

There is a common misconception that a market correction is the same as a bear market. As per the standard definition, a bear market involves a falling economy in which stock prices decline steadily over time. Markets are considered bearish when they decline by at least 20 per cent, while a market correction is said to occur when stock prices decline by at least 10 per cent. A market correction, unlike a bear market, allows the economy to show better growth when its real value readjusts the price of securities.

How to prepare for a stock market correction

Practise judicious asset allocation: Investing in the stock market offers investors a buying opportunity to make money when the market is up and remain protected when it is down. One effective strategy experienced traders follow is portfolio management, wherein their portfolio contains an appropriate mix of bonds, commodities, and stocks. As a result of this diversification, the investor will have the ability to survive any hard times that can occur during a market correction. Purchase stocks during dips: For successful investing, you need to have adequate cash to make it through short-term or long-term dips in the market touching your investments. It is a good idea to have a slush fund handy to purchase a dip on a down day. So, when prices drop, think about how you can use the situation to your advantage by investing more money every month. In over 100 years of stock market history, prices have always gone back up at some point, so do not pull your money out of the market in a panic when prices drop

What about value stocks?

A value stock is a stock whose price is below its intrinsic or book value. In value investing, you buy and hold shares of a small cap company at a price below their intrinsic value over the long term in a conservative manner. These stocks generally perform better during economic downturns and market corrections. In value investing, the selection of stocks is generally determined by two principles: the intrinsic value of the investment and its margin of safety. Naturally, you should carefully evaluate a company's past performance, the quality of its business and management, and long-term endurance before buying its value stocks.

What is the intrinsic value of a small cap stock?

A variety of factors determine the intrinsic value of a small cap stock, such as the company's fundamentals and performance - including its cash flow, revenue, and earnings. Other factors matter too, such as the company’s brand recognition, business model, etc. If these are strong, it indicates that the company’s fundamentals are robust, and there is a good chance of its stock value rising. Investing in undervalued small cap stocks, hoping to see better returns when the market stabilises, is a great strategy that is often employed by seasoned investors.

Should one buy small cap stocks during a market correction?

There has been a sell-off in the Indian stock market after the onset of the Russia-Ukraine war. However, since the beginning of this year, Sensex and Nifty have corrected by over 10 per cent, whereas the small cap index witnessed a correction of over 16 per cent in 2022. As a result, positional investors or small cap companies searching for value picks offered at discount prices may be lured into buying small cap stocks if it looks like the market will rebound soon. When a company's fundamentals are excellent, the share price won't fall beyond a certain limit. Therefore, investors can generate greater returns by purchasing quality stocks available at such low prices after such heavy corrections. The founder of Wright Research has said that small cap stocks recover much quicker than large-cap stocks. Despite all this, there does not appear to be any sign of a long-term market recovery. As a result of the current level of uncertainty, it is recommended that small cap stocks be bought with caution. Though small cap stocks are more likely to do well in inflationary environments than large-cap stocks, even in the small-cap bracket, it is advised to pick value stocks with strong capital structures and differentiation to maximise returns.

What is the expected performance of small cap stocks in 2022?

In FY 2021-22, as per stock market news, small-cap stocks posted returns of up to 36.64 per cent, outperforming the bigger benchmark gauge, and experts expect them to continue to do so in the following year. However, during the latter part of the last fiscal, the markets faced several headwinds, including the emergence of geopolitical tension, concerns about inflation, and selling by foreign institutional investors. According to analysts, the first half of the last fiscal year was very good, while the second half was characterised by high volatility and consolidation. As a result of the market's resilience, it is showing signs of a strong bull run, with everything moving in the right direction. We are currently amidst a structural bull market, but intermediate corrections will also be a part of this journey. The Indian economy is ready for multiyear growth despite short-term hiccups, so financial analysts are of the opinion that mid-cap and small-cap stocks should continue to outperform in FY23. This can be gauged by the fact that the BSE small-cap index ended in the black for 14 out of the last 15 years with an average gain of 7 per cent. The market correction seen in the past 5-6 months has made mid-and small-cap stocks appear to be attractive investment propositions. Small cap stocks trade at a discount compared to large and mid-cap stocks based on their forward earnings growth. However, short-term volatility is inevitable due to high inflation, a slowing economy, and downgrades in future earnings. Despite all this, small-cap stocks have the capacity to outperform the main indices when they are supported by liquidity and during the glory period of the market.

Should you buy small cap stocks during a market correction?

Small cap stocks performance in 2022 - Should you invest in small cap stocks during a market correction?

Date : 19/10/2022
Read: 8 mins

A market correction is defined as the drop in a company's market price after hitting a peak. In most cases, these tend to be short-lived and last for no longer than 3-4 months. Is it worth buying small caps during a market correction? Let’s find out.

A market correction is usually considered to have occurred when there is a fall of 10 per cent or more in the value of any security such as equity, stock, mutual funds, a currency market, an index, or any other asset. There is the possibility that stock exchanges, assets, or the entire capital market may fall for weeks, a couple of months, or even years. In most cases, market corrections tend to be short-lived and last for 3-4 months, as per a recent market analysis. Stock market correction: Why does it occur? The presence of market corrections is a healthy sign since an incessant rise in the stock market may have negative implications for the economy over the long term. The rise in share prices translates to an economic boom. A continuous increase in the prices of the benchmark indi...

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