Speculative Bubble

AAA

DEFINITION of 'Speculative Bubble'

A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest.

The bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments.

May also be referred to as a "price bubble" or "market bubble".

INVESTOPEDIA EXPLAINS 'Speculative Bubble'

Speculative bubbles have a long history in world markets; the progression of time along with economic advances has not slowed their arrival. In our modern financial markets, speculators can often make profitable bets when speculative bubbles burst by purchasing derivatives or shorting securities directly.

While each speculative bubble has its own driving factors and variables, most involve a combination of fundamental and psychological forces. In the beginning, attractive fundamentals may drive prices higher, but over time behavioral finance theories suggest that people invest so as to not "miss the boat" on high returns gained by others. When the artificially high prices inevitably fall, most short-term investors are shaken out of the market after which the market can return to being driven by fundamental metrics.

RELATED TERMS
  1. Bubble Company

    A company whose valuation greatly exceeds that suggested by its ...
  2. Speculation

    The act of trading in an asset, or conducting a financial transaction, ...
  3. Inflation Targeting

    A central banking policy that revolves around meeting preset, ...
  4. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
  5. Greater Fool Theory

    A theory that states it is possible to make money by buying securities, ...
  6. Boom

    A period of time during which sales of a product or business ...
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. thinkstock|istock
    Active Trading

    What Is Market Efficiency?

    The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible?
  3. Active Trading Fundamentals

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  4. Active Trading Fundamentals

    How The Power Of The Masses Drives The Market

    Market psychology is an undeniably powerful force. Find out what you can do about it.
  5. Active Trading

    The Financial Markets: When Fear And Greed Take Over

    If these unpleasant emotions are allowed to influence your decision-making, they may cost you dearly.
  6. Economics

    5 Steps Of A Bubble

    Bubbles are deceptive and unpredictable, but by studying their history we can prepare to our best ability.
  7. Options & Futures

    Market Problems? Blame Investors

    Investors are only human, and their irrational behavior can often move the market.
  8. Insurance

    Riding The Market Bubble: Don't Try This At Home

    Riding the bubble takes timing, a clear understanding of the market and, most of all, a lot of luck.
  9. Credit & Loans

    An In-Depth Look At The Credit Crisis

    The credit crisis reshaped the financial landscape and changed Wall Street forever. Find out how it happened.
  10. Active Trading Fundamentals

    What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying asset. Hedging attempts to eliminate the volatility associated with the ...

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center