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.


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.

  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. Crash

    A sudden and significant decline in the value of a market. A ...
  6. Correction

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