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.

RELATED FAQS
  1. What is an echo bubble?

    To understand the term "echo bubble", you have to understand what a bubble is. A financial or economic bubble occurs when ... Read Answer >>
  2. Can the Efficient Market Hypothesis explain economic bubbles?

    Learn about the nuanced relationship between the efficient market hypothesis and economic bubbles and the requirements and ... Read Answer >>
  3. What economic factors influence corporate bond yields?

    Discover how to notice the early warning signs of a tech bubble. Like most bubbles, a rapid rise in asset values, is usually ... Read Answer >>
  4. How has investing in the Internet sector evolved over time?

    Learn how early investors of the Internet sector received a valuable lesson and influenced modern-day markets after the dot-come ... Read Answer >>
  5. What average annual return has the internet sector historically generated?

    Learn about the performance of Internet stocks, one of the newest types of investment sectors, and discover how stock bubbles ... Read Answer >>
  6. What burst the Mississippi bubble?

    In 1715, France was essentially insolvent as a nation. Even though taxes were raised to extremely high levels, the hole that ... Read Answer >>
Related Articles
  1. Investing

    Economic Bubble: Toil And Trouble!

    You might like the idea of profiting from a bubble, but you’d probably like to avoid suffering from its aftermath. Here is how an economic bubble works.
  2. Investing

    How Does a Bubble Form and Burst?

    A bubble forms when prices grow beyond their true value.
  3. Insights

    Some Industries Are More Bubbly Than Others

    Investors who want to avoid future bubbles should learn from the past in order to protect their investments.
  4. Insights

    5 Ways To Spot The Next Stock Bubble - And Avoid It

    Playing a market bubble could pay off, but it carries a lot of risk. Avoiding it could be the way to stay profitable.
  5. Insights

    5 Steps Of A Bubble

    Bubbles are deceptive and unpredictable, but by studying their history we can prepare to our best ability.
  6. Financial Advisor

    Are We Heading for a Real Estate Bubble?

    Housing prices across the United States have been on a steady rise over the past few years. Does this mean we are seeing another bubble?
  7. Investing

    A Bond Bubble: CFAs Say We're in One

    Almost 90% of CFAs think the bond market is in bubble territory, a recent poll has found.
  8. Insights

    4 Reasons Why Irrational Exuberance Lasts

    20 years ago, Alan Greenspan gave his famous "irrational exuberance" speech, but asset bubbles take a long time to pop.
  9. Investing

    What A Tech Bubble Could Mean For The Economy

    Are technology stocks in a bubble? And if so, what might the consequences be?
  10. Small Business

    Why Social Media Isn't Like The Dotcom Boom

    Many investors see social media stocks as a bubble waiting to burst. Find out why they're wrong.
RELATED TERMS
  1. Tech Bubble

    A pronounced and unsustainable market rise attributed to increased ...
  2. Bubble

    1. An economic cycle characterized by rapid expansion followed ...
  3. Dotcom Bubble

    A rapid rise in equity markets fueled by investments in internet-based ...
  4. Standard Of Living Bubble

    The concept of consumers living beyond their means for an extended ...
  5. Herd Instinct

    A mentality characterized by a lack of individual decision-making ...
  6. Crash

    A sudden and significant decline in the value of a market. A ...
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  6. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
Trading Center