When financial markets experience turbulence, Wall Street employs specialized jargon to describe uncertainty. Below are essential terms every investor should know during volatile periods.
Core Market Terms
Bear Market
A bear market occurs when a stock, bond index, or commodity price declines by 20% or more from recent highs. Contrasted with a bull market, which signifies rising prices.
Bubble
A bubble refers to asset prices rising inexplicably high (e.g., stocks, real estate). Eventually, bubbles burst, leading to sharp declines.
Correction
A correction is a 10%+ reversal in an asset’s price trend, usually downward. Though corrections can be temporary, they often signal heightened market volatility.
Dead Cat Bounce
A temporary price rebound after a severe drop, resembling a "dead cat bounce." This term highlights short-lived recoveries in declining markets.
Risk Management Strategies
Hedge
Hedging mitigates risk by offsetting potential losses. Example: Buying a put option to protect against falling stock prices.
Liquidity
Liquidity describes how easily assets can be traded without major price changes. Illiquid markets face higher volatility due to fewer buyers/sellers.
Margin Call
When borrowed funds (via a margin account) lose value, brokers issue a margin call, demanding additional collateral. Failure to comply may force asset sales.
Regulatory Safeguards
Limit Up/Limit Down (LULD)
LULD rules prevent extreme volatility by setting price bands for trades. These bands adjust dynamically based on recent average prices.
Market-Wide Circuit Breaker
Triggered by S&P 500 drops:
- 7% or 13% decline: 15-minute trading halt.
- 20% decline: Trading stops for the day.
Investor Behavior
Panic Selling
Panic selling occurs when fear drives rapid asset sales, often exacerbating price declines. Emotional decisions can lead to significant losses.
Risk-On/Risk-Off
- Risk-off: Investors favor stable assets during turmoil.
- Risk-on: Higher-risk assets are preferred in bullish markets.
Market Indicators
Volatility
Measured by indices like the VIX, volatility reflects rapid price fluctuations. Regulatory tools (e.g., LULD) aim to curb excessive swings.
Safe Haven
Assets like gold or government bonds are considered safe havens during crises, though no investment is entirely risk-free.
FAQ Section
What defines a bear market?
A bear market is marked by a 20%+ decline from recent peaks, persisting over time.
How do investors hedge risk?
By using tools like options or diversifying portfolios to offset potential losses.
What happens during a margin call?
Investors must deposit additional funds or assets to cover loan collateral shortfalls—or face forced sales.
👉 Learn more about market strategies for turbulent times.
Stay informed—market literacy empowers better decisions.