Q: What's the difference between recessions, corrections, and stock market crashes?
These three terms are often incorrectly used interchangeably, but in fact, they have different meanings.
Continue Reading Below
A recession is an economic term that refers to a general slowdown in economic activity, generally defined as two consecutive quarters of negative GDP growth. While the effects of a recession often cause the stock market to fall, the term itself doesn't refer to a specific type of market activity.
A correction refers to a fall in the overall stock market, a specific index, or an individual stock, generally of at least 10%. Market corrections are common events, historically occurring about once per year, with the most recent example in early 2016. Market corrections are generally short-term dips, and are not to be confused with a bear market, which is a longer-term period of falling stock prices and general market pessimism.
Finally, a stock market crash is a sudden drop of stock prices, either throughout the entire stock market, or in a specific sector. The Crash of 1929, which was followed by the Great Depression, is the most well-known example, with the market plunging by 23% over a two-day period and eventually losing 89% of its value before bottoming out. Other examples are Black Monday in 1987, when the Dow Jones Industrial Average lost 22.6% in one day, and the crash of 2008, in which the market dropped 21% in a week.
The bottom line is that recessions, corrections, and bear markets are all normal and healthy economic occurrences, while stock market crashes are unusual events, often driven by panic.
Offer from The Motley Fool: The 10 best stocks to buy nowMotley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the S&P 500!*
Tom and David just revealed their ten top stock picks for investors to buy right now.
*Stock Advisor returns as of Nov. 6, 2017.
The Motley Fool has a disclosure policy.