Tech Bubble

DEFINITION of 'Tech Bubble'

A pronounced and unsustainable market rise attributed to increased speculation in technology stocks. A tech bubble is highlighted by rapid share price growth and high valuations based on standard metrics like price/earnings ratio or price/sales.

The technology stocks involved in a bubble may be confined to a particular industry (such as internet software or fuel cells), or cover the entire technology sector as a whole, depending on the strength and depth of investor demand. At the peak of a bubble, many fledging tech companies will seek to go public through initial public offerings (IPOs) in an attempt to capitalize on heightened investor demand.

BREAKING DOWN 'Tech Bubble'

During the formation of a tech bubble, investors begin to collectively think that there's a huge opportunity to be had, or that it's a "special time" in the markets. This leads them to purchase stocks at prices that normally wouldn't even be considered. New metrics are often used to justify these stock prices, but fundamentals as a whole tend to take a backseat to rosy forecasts and blind speculation.

A bubble may end with a crash, or may simply deflate as investors slowly lose interest and sales pressure pushes stock valuations back to normalized levels.

The most recent (and biggest in terms of scope) tech bubble occurred in the late 1990s and ended rather abruptly in early 2000. The causes for its downfall are numerous, but evidence of this decline first appeared within the big telecom hardware providers, who at the time were supplying most of the tech startups and dotcoms with servers and networking hardware. Once revenue at the telecoms fell off dramatically, it rippled through their respective end markets and eventually, the entire economy slipped into recession in 2001.

RELATED TERMS
  1. Cloud Computing

    A model for delivering information technology services in which ...
  2. Internet Bubble

    A rapid rise in equity markets caused by speculation into online-based ...
  3. Bubble Theory

    A school of thought that believes that the prices of assets can ...
  4. Tulipmania

    Tulipmania was the first major financial bubble. Investors began ...
  5. Blackberry Addiction

    A slang term used to describe an over reliance on and almost ...
  6. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
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. Fundamental Analysis

    Getting On The Right Side Of The P/E Ratio Trend

    Buying at the right time is crucial, but how do we know when that is?
  3. 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.
  4. Investing Basics

    Cheap Stocks Can Be Deceiving

    Find out how to tell a truly undervalued stock from one that has been legitimately beaten down.
  5. Active Trading

    Does Bad PR Make For A Good Investing Opportunity?

    Like most other kinds of turnaround investing, investing in the face of bad PR can be a high-risk/high-reward situation.
  6. Personal Finance

    Investing In Fads

    From high-flying to fading fast, fads can mean big money for nimble investors.
  7. 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.
  8. Economics

    Economic Meltdowns: Let Them Burn Or Stamp Them Out?

    Whether the Fed should intervene in market bubbles is up for debate. Learn about both sides here.
  9. Budgeting

    The Greatest Market Crashes

    From a tulip craze to a dotcom bubble, read the cautionary tales of the stock market's greatest disasters.
  10. Retirement

    Is it Safe for Retirees to Invest in Technology?

    Tech stocks are volatile creatures, but there are ways even risk-adverse retirees can reap rewards from them. Here are some strategies.
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 kinds of securities are influenced most by systematic risk?

    Systematic risk does not just affect a particular stock or an industry; it affects the overall market. Systematic risk always ... Read Full Answer >>
  3. 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 >>
  4. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  5. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  6. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  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 ...
Trading Center