Bust

DEFINITION of 'Bust'

A bust is a period of time during which economic growth decreases rapidly. In the stock market, busts are usually associated with bear markets. During busts, inflation decreases, and in extreme cases, can cause deflation. In addition, unemployment rises, income falls and demand decreases. Because of the cyclical nature of the economy, a bust usually follows a boom in what is called the "boom and bust" cycle.

BREAKING DOWN 'Bust'

The boom and bust economic cycle involves the rapid growth of a particular sector, called a boom, followed by a rapid contraction, the bust. The alternation of the boom and bust paradigms form the boom and bust cycle. This cycle is seen to be fairly common, particularly in a capitalist society, though this event is not exclusive to capitalist nations.

Due to the market trends present during the cycle, the boom is associated with a bull market and the bust is associated with a bear market. A boom or bust can take place in one market sector while other market sectors see more modest, if not contrasting, results. A boom in one sector normally translates into a upward trend of the market overall, just as a bust in one sector translates into an overall downward trend. It also has a more notable impact on industries with close ties to the one experiencing the boom or bust. For example, a bust in the automotive market has a greater impact on tire manufacturers than pharmaceutical manufacturers.

Implications of a Bust

Depending on the scale of the bust, some economic side effects may occur beyond the original sector responsible for the boom. This can include an economic recession. A recession commonly involves falling gross domestic product (GDP) and rising unemployment. In turn, the recession can lead to rapid default in the consumer debt marketplace, worsening the situation as a whole.

Alternate Definitions of Bust Finance

A bust can also refer to the cancellation of an order that a broker has already completed. The most common cause of a bust, in this sense, is when an error occurs as part of the transaction. This can include a mistake in how the order was executed, a technical error resulting in an inaccurate transaction or a misunderstanding in what was truly being requested of the broker. This use of the term bust is also called a break. A more common use of the term bust involves any circumstance upon which an investment reaches zero. This can include personal losses experienced while gambling.

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