Ask a Fool: When is it fair to say the stock market is crashing? – USA TODAY

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On the 30th anniversary of the 1987 stock market crash, U.S. stocks are at a record high and investors are concerned that steep valuations may mean a correction is overdue. Video provided by Reuters Newslook

It’s been a turbulent week for stocks, but this isn’t exactly a crash.

Q: The Dow Jones Industrial Average plunged by more than 1,900 points over the past two weeks, and stocks have been extremely volatile. Is this the beginning of a stock market crash?

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 was also 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.

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