Bubble

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. Speculation

    The act of trading in an asset, or conducting a financial transaction, ...
  5. Crash

    A sudden and significant decline in the value of a market. A ...
  6. Stock Market Capitalization To ...

    A ratio used to determine whether an overall market is undervalued ...
Related Articles
  1. Mutual Funds & ETFs

    Are the Most Popular Mutual Funds Your Best Bet?

    Learn about the dangers that come with investing in the most popular mutual funds and discover how investors can better fill out their portfolios.
  2. Retirement

    Top 5 TIAA-CREF Funds for Retirement Diversification in 2016

    Discover how to safely diversify your retirement savings and receive excellent investment returns using a selection of TIAA-CREF low-fee mutual funds.
  3. Mutual Funds & ETFs

    VHT: Vanguard Health Care ETF

    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.
  4. Stock Analysis

    The Top 5 Mid-Cap Gold Stocks for 2016

    Discover the top five mid-cap gold stocks for 2016, with a summary of each company and the outlook for both gold and the gold-mining industry.
  5. Stock Analysis

    Is the Stock Market Crashing? 5 Signs to Consider

    Learn about some signs of a potential stock market crash including a high level of margin debt, lots of IPOs, M&A activity and technical factors.
  6. 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.
  7. Active Trading Fundamentals

    Looking to Go Short on China? Here's How (FXI, HAO)

    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.
  8. Home & Auto

    Why Housing Market Bubbles Pop

    Home price appreciation is not assured. Can you withstand the volatility in this market?
  9. 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.
  10. Options & Futures

    Market Problems? Blame Investors

    Investors are only human, and their irrational behavior can often move the market.
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. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  6. 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 >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  6. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
Trading Center