Is this a bear market or a market correction?

Wow it's a bit choppy out there at the moment!

Nasty share price falls across the board today. The big question is are we going through a market correction before the bull chases ahead again? Or is this a bear market? There's a clear distinction.

Market corrections are usually sharp and short. Short term pain is normally short-lived before share prices recover and more often than not move sharply ahead again. Bear markets are more painful, and often endure for between 1-2 years.

So which is it? Nobody knows yet. We'll have to wait and see.

If it's a bear market then I'd suggest that you carefully look at the company shares you own and ask yourself the following questions:-

Does the company make a profit?

Does the company have positive cashflow?

Is the company debt free?

Is the company's P/E ratio a sensible one? (Anything above 25 is quite racy)

Does the company pay a dividend which is well covered?

Is the market cap. no more than three times the TNAV?

If the answer to (let's say) two of those questions is yes then you might want to just see the bear out? Your company is unlikely to go bust because it's got a safety net (a margin of safety). A healthy dividend yield, solid earnings in relation to share price, a strong balance sheet etc. should eventually attract buyers and stop the shares going into freefall.

However, if the answer to all those questions is no then you may want to consider cashing in your profits or losses. You're holding a highly speculative company which carries no safety net, and consequently the share prices will fall more significantly than most. Momentum plays work both ways. Value becomes king! Raising cash in bear markets can be very difficult, and by implication if you've answered no to all the above then your company will very probably need either loans or a fund raise. Banks are not so keen to lend, and institutions want their pound of flesh and will only offer cash at huge discounts to prevailing share prices. Some speculative companies will inevitably go bust.

At this stage nobody can say for sure if this is a correction or a bear market, but it's a good time to assess just how financially secure the companies you've invested in are.

As ever, I don't give sell or buy recommendations. Please do your own research carefully.

twitter: @michae1mouse