Recently there has been talk of a correction in the stock market. Pull up the Dow Jones stock chart and over a couple months and it might just look like a huge roller coaster with an overall rise in the value. Zoom in on a few days, however, and youll see what everyone reacts to  a big gain or a big drop over a period of a couple days. Any time theres a big drop over a couple days, talk of a correction arises (generally speaking). So what is a correction, and how can you take advantage?

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Corrections are basically a temporary decline in a price that occurs after the stock price has been rising. The term can apply to an overall market or an individual stock, neither of which is mutually exclusive of the other. Its typically a short decline in price, but could be followed by a subsequent recession which is a longer term decline in market price.

I only invest for myself these days and definitely advise you to talk to your broker, but I can offer my opinion here. These days, investors are very cautious of big gains weve seen the dot com bubble burst, weve seen the great recession that started in 07 / 08, and weve grown leery of the consistency of big gains and overvaluation in a sector or stock. When a stock price keeps going up, we might assume it becomes overvalued, right? So theres a correction.

How do you beat this? Well, the short answer is to become an expert stock trader and know everything. Sounds tough, impossible. Thats because it is.

There are a few options, however. Say you bought 10 shares of a stock at $100 per share ($1,000 investment). The stock flew up to $500 per share extremely quickly. You can sell 2 shares of stock to recoup your $1,000 investment and then reinvest it elsewhere while keeping the remaining 8 shares invested (while keeping an eye on it for volatility, of course). You could also sell half your shares to pull a $2,500 portion out to reinvest elsewhere (net + $1,500 cash on top of your $1,000 initial) and then leave the other 5 in for further gains again, keeping an eye on it for volatility.

See what were getting at here? 2 basic rules: Diversity and Protect Your Profits .

Diversity is possibly the most important rule you dont want all your eggs in one basket. Spread it out when you can so a loss in one stock or sector doesnt ruin your whole portfolio.

Also, make sure to protect your profits (and cut your losses, but thats another topic) when your investment skyrockets, you should be prepared for a correction. With the right strategy, you could even sell on the high and re-buy after the correctionbut thats way tougher than simply remembering to protect your gains.

There is much more to learn in the stock market, but hopefully this article will serve as a reminder for beginners. Diversify and protect your profits (in reality, protect your money).

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