Froth

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DEFINITION of 'Froth'

Market conditions preceding an actual market bubble where asset prices become detached from their underlying intrinsic values as demand for those assets drives their prices to unsustainable levels. Market froth marks the beginning of unsustainable rates of asset price inflation.

BREAKING DOWN 'Froth'

An interesting example of a frothy market was Holland's tulip bulb market in the early 1600s. The market for tulip bulbs went through a huge run up and crash.

People mortgaged whatever they could to raise cash to trade tulip bulbs. In 1633, a farmhouse changed hands for three tulip bulbs. The market top came in the winter of 1636-37 when a single tulip bulb, left along with 70 other tulip bulbs as seven orphans' only inheritance, sold for 5,200 guilders. Soon after the top, tulip bulbs traded for 1/100 of what they had two weeks earlier.

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