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.

INVESTOPEDIA EXPLAINS '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 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. What are the requirements for being a Public Limited Company?

    The requirements for an entity to be considered a public limited company (PLC) include registration requirements, establishing ... Read Full Answer >>
  6. How do I place an order to buy or sell shares?

    It is easy to get started buying and selling stocks, especially with the advancements in online trading since the turn of ... Read Full Answer >>
Related Articles
  1. Home & Auto

    Why Housing Market Bubbles Pop

    Home price appreciation is not assured. Can you withstand the volatility in this market?
  2. 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.
  3. Options & Futures

    Market Problems? Blame Investors

    Investors are only human, and their irrational behavior can often move the market.
  4. 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.
  5. Active Trading Fundamentals

    Mad Money ... Mad Market?

    Jim Cramer's spirited recommendations are a case study in irrational market behavior.
  6. 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.
  7. Budgeting

    The Greatest Market Crashes

    From a tulip craze to a dotcom bubble, read the cautionary tales of the stock market's greatest disasters.
  8. Options & Futures

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  9. Fundamental Analysis

    Do Stock Splits Cause Volatility?

    Since stock splits decrease the stock price, do they also increase volatility because shares are traded in smaller increments? Investopedia examines assumptions about this increasingly common ...
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard MSCI EAFE

    Learn more about Vanguard's index-shifting, low-cost and non-U.S. market exchange-traded fund: the FTSE Developed ex U.S. Markets ETF.

You May Also Like

Hot Definitions
  1. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  2. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  3. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  4. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  5. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  6. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
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!