Tech Bubble

AAA

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.

INVESTOPEDIA EXPLAINS '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. Why Housing Market Bubbles Pop
    Home & Auto

    Why Housing Market Bubbles Pop

  2. Getting On The Right Side Of The P/E ...
    Fundamental Analysis

    Getting On The Right Side Of The P/E ...

  3. How The Power Of The Masses Drives The ...
    Active Trading Fundamentals

    How The Power Of The Masses Drives The ...

  4. Cheap Stocks Can Be Deceiving
    Investing Basics

    Cheap Stocks Can Be Deceiving

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center