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.

  1. How can I hedge my portfolio to protect from a decline in the food and beverage sector?

    The food and beverage sector exhibits greater volatility than the broader market and tends to suffer larger-than-average ... Read Full Answer >>
  2. How attractive is the food and beverage sector for a growth investor?

    The food and beverage sector is attractive for a growth investor. The sector's high degree of volatility means it tends to ... Read Full Answer >>
  3. What techniques are most useful for hedging exposure to the insurance sector?

    Investing style determines the best hedging techniques for the insurance sector. This sector comprises three segments, two ... Read Full Answer >>
  4. How can I hedge my portfolio to protect from a decline in the retail sector?

    The retail sector provides growth investors with a great opportunity for better-than-average gains during periods of market ... Read Full Answer >>
  5. What options strategies are best suited for investing in the retail sector?

    Retail is a broad sector whose seven discrete segments all exhibit greater volatility than the broader market. The sector ... Read Full Answer >>
  6. What techniques are most useful for hedging exposure to the utilities sector?

    Utilities is one of the most stable sectors in the market. As such, its primary appeal to investors is its resistance to ... Read Full Answer >>
Related Articles
  1. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  2. Investing

    How to Spot Secular Bull Markets vs. Secular Bear Markets

    A guide to identifying secular bull and bear markets.
  3. Financial Advisors

    Bull vs. Bear Markets: How to Be Prepared for Both

    Bull and Bear Markets are a reality that every investor must be prepared for. Here are a few tips.
  4. Investing

    Will Facebook's New App Leave Siri in the Dust?

    Currently Facebook is testing its new super intelligent virtual assistant, known as, "M". Can this new AI on the block dethrone Apple's Siri?
  5. Investing

    YouTube Red vs. Netflix vs. Spotify

    YouTube Red offers a unique and compelling combination of ad-free video and music streaming.
  6. Stock Analysis

    Match.com IPO: Is it a 'Buy' or Should You Pass?

    Demand for relationships is always high. Now you will have a way to directly invest in the relationship market. But is it priced fairly?
  7. Stock Analysis

    If You Had Invested in Qualcomm Right After Its IPO

    Find out about how much you would have if you had bought 100 shares of Qualcomm during its initial public offering and the amount you would receive in dividends.
  8. Mutual Funds & ETFs

    3 ETFs That Invest in Semiconductors

    Obtain information on three of the most widely traded ETFs that investors utilize to gain investment exposure to the important semiconductor industry.
  9. Fundamental Analysis

    Yahoo, Google Back Together in Search Deal

    Google and Yahoo have signed a search deal yet again. The question is whether this one will stick.
  10. Stock Analysis

    Is Apple Overreliant on China?

    Apple's fourth quarter was more sweet than sour. But will that story hold true next year if China suffers another stock shock?
  1. Implied Volatility - IV

    The estimated volatility of a security's price.
  2. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  3. Virtual Good

    A good or product traded in the non-physical realm, typically ...
  4. Honey Badger Stock Market

    A play on an Internet meme of 2011 made to relate to the stock ...
  5. Buyers/Sellers On Balance

    1. A ratio based on aggregate market orders for securities that ...
  6. Chief Technology Officer - CTO

    An executive who is responsible for the management of an organization's ...

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center