What do people mean when they say there is a "bubble" going on in the market, such as a "housing bubble" or a "technology bubble"?

By Chris Gallant AAA
A:

A financial "bubble" refers to a situation where there is a relatively high level of trading activity on a particular asset class at price levels that are significantly higher than their intrinsic values. In other words, a bubble occurs when certain investments are bid up to prices that are far too high to be sustainable in the long run.

During the "technology bubble" of the late 1990s, many new technology ("dotcom") companies had their common stock bid up to extremely high prices in a relatively short period of time. Even companies that were little more than startups and had yet to produce actual earnings were bid up to large market capitalizations by speculators attempting to earn a quick profit from the bull market in the technology sector. By 2001 however, the technology bubble burst and many of these formerly high-flying stocks came crashing down to drastically lower price levels.

Similarly, the housing bubble that occurred following the technology bubble was characterized by an initial increase in housing prices due to fundamentals, but as the bull market in housing continued, many investors began buying homes as speculative investments, and this unsustainable run-up in housing prices eventually came crashing down as well.

To learn more, check out Why Housing Market Bubbles Pop.

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