Q: The Down Jones Industrial Average plunged by more than 2,300 points over the past week 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 October 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 is down by 10.4%. 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 Monday, 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.
Offer from The Motley Fool: The 10 best stocks to buy now
Motley 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 Feb. 5, 2018.
- Do You Really Need a Financial Planner?
- Motley Fool Stock Advisor Is Turning 200 (Months)!
- 3 Financial Mistakes That Will Haunt You for Decades
- Surprising Financial Facts About the "Sandwich Generation"
- These Once-Crushed ETFs Did a Lot Better in Wednesday's Crash
The Motley Fool has a disclosure policy.