Whenever the stock market has a big drop, like in October 2018, financial news outlets start throwing around terms like “drop” or “correction” or even “crash.”
These are semantic terms, general labels to describe a market that behaves in complicated ways.
Generally speaking, a drop or dip is any brief downturn in stock prices before a longer period of growth. Drops are normal. The stock market may experience many dips in a year that still sees overall growth.
A correction is a 10 percent drop in the stock market. This term implies that a certain stock or the market generally was overvalued and the new, lower price is a more accurate representation of its worth.
A crash is a massive loss in stock price. When a stock or the market crashes, its price drops by a significant percentage. This can be the first step in a period of economic hardship, such as after the 1928 crash that began the Great Depression or it can be temporary. Nerdwallet cites the “Black Friday” crash in 1987 as an example of the latter, where stocks dropped 23 percent in a day but rebounded the next year.
The difference between a crash and a correction is size.
Predicting either one is difficult. It can even be difficult to tell which one is happening while it is happening. A slow stock drop that looks like a correction could keep going and become a crash.