Bubble

AAA

DEFINITION of 'Bubble'

1. An economic cycle characterized by rapid expansion followed by a contraction.

2. A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs.

3. A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts.

BREAKING DOWN 'Bubble'

Bubbles form in economies, securities, stock markets and business sectors because of a change in the way players conduct business. This can be a real change, as occurred in the bubble economy of Japan in the 1980s when banks were partially deregulated, or a paradigm shift, as happened during the dotcom boom in the late '90s and early 2000s. During the boom people bought tech stocks at high prices, believing they could sell them at a higher price until confidence was lost and a large market correction, or crash, occurs. Bubbles in equities markets and economies cause resources to be transferred to areas of rapid growth. At the end of a bubble, resources are moved again, causing prices to deflate. Thus, there is little long-term return on those assets.

RELATED TERMS
  1. Dotcom Bubble

    An rapid rise in equity markets fueled by investments in internet-based ...
  2. Bubble Theory

    A school of thought that believes that the prices of assets can ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. ...
  4. Contraction

    A phase of the business cycle in which the economy as a whole ...
  5. Correction

    A reverse movement, usually negative, of at least 10% in a stock, ...
  6. Crash

    A sudden and significant decline in the value of a market. A ...
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: Vanguard Health Care

    Learn about the Vanguard Health Care ETF, its holdings and how it may be appropriate for a growth-oriented investor who wants to invest in the sector.
  2. Investing Basics

    A Look At the Buy Low, Sell High Strategy

    Learn how to buy low and sell high by using objective measures to identify opportunities. Buying low and selling high is the goal of every investor.
  3. Active Trading Fundamentals

    Looking to Go Short on China? Here's How

    Learn how to take short positions on markets in China by investing in long and short exchange-traded funds focusing on the Chinese equities market.
  4. Home & Auto

    Why Housing Market Bubbles Pop

    Home price appreciation is not assured. Can you withstand the volatility in this market?
  5. Economics

    The Myth About Market Bubbles

    Bubbles have made and ruined fortunes. Though they can be difficult to predict, understanding how they work gives you a visible advantage.
  6. Options & Futures

    Market Problems? Blame Investors

    Investors are only human, and their irrational behavior can often move the market.
  7. Active Trading

    Market Cycles: The Key To Maximum Returns

    You need to understand the various phases of the market cycle to avoid bubbles and make the best investments.
  8. Active Trading Fundamentals

    Mad Money ... Mad Market?

    Jim Cramer's spirited recommendations are a case study in irrational market behavior.
  9. Personal Finance

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  10. Budgeting

    The Greatest Market Crashes

    From a tulip craze to a dotcom bubble, read the cautionary tales of the stock market's greatest disasters.
RELATED FAQS
  1. What economic factors influence corporate bond yields?

    The most telling signs that a tech stock is about to burst are no different from the signs of impending collapse of stocks ... Read Full Answer >>
  2. What are some of the ways that economic growth can be achieved?

    Economic growth is measured by an increase in gross domestic product, or GDP, which is defined as the combined value of all ... Read Full Answer >>
  3. How do interest rates coordinate savings and investment in the economy?

    In modern economies, some individuals earn more money than they need to spend on present goods. There are other individuals ... Read Full Answer >>
  4. What do people mean when they say there is a "bubble" going on in the market, such ...

    A financial "bubble" refers to a situation where there is a relatively high level of trading activity on a particular asset ... Read Full Answer >>
  5. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  6. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  3. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  4. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  5. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!