Q: What events de­fine a stock mar­ket crash?

Chicago Sun-Times - - AMERICA’S MARKETS - Matthew Frankel The Mot­ley Fool

An­swer: While a crash is loosely de­fined as a “sud­den drop” in stock prices, it’s gen­er­ally much big­ger in mag­ni­tude than this.

For ex­am­ple, on Oct. 19, 1987, when the Dow lost nearly 23% of its value in a sin­gle day, that was a crash. The 2008 near- col­lapse of the U. S. fi­nan­cial sys­tem also was a crash.

This is sim­ply a mar­ket cor­rec­tion, and so far, a rather mild one at that. A cor­rec­tion is de­fined as a 10% drop from re­cent highs, and the Dow dropped as much as 10.4% re­cently ( cur­rently it’s down about 7.2%).

It just seems like a ma­jor con­trac­tion be­cause, for the past cou­ple years, the mar­ket has es­sen­tially gone straight up. We’re just not used to see­ing big de­clines any­more.

Ad­di­tion­ally, since the mar­ket has climbed so high over the past few years, the larger head­line num­bers make the sit­u­a­tion seem worse than it re­ally is. The 1,175- point drop in the Dow on Feb. 5, was the largest ever. How­ever, from a per­cent­age stand­point, the 4.6% loss it rep­re­sents doesn’t even rank in the top 20.

The point is that this is just a cor­rec­tion, which is part of a nor­mal stock mar­ket.

Stay calm and keep your eye on your long- term in­vest­ing goals. From that stand­point, it’s like the stock mar­ket just went on sale.

The Mot­ley Fool is a USA TO­DAY con­tent part­ner of­fer­ing fi­nan­cial news, anal­y­sis and com­men­tary. Its con­tent is pro­duced in­de­pen­dently of USA TO­DAY.

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