A:

The tech bubble crash taught investors that despite their efforts to provide an influx of cash into a rapidly growing market, there are no guarantees. While this seems like an obvious lesson for any investor, in the early days of the Internet it seemed like the dot-com industry was a truly burgeoning market that would produce big results. During this boom time, there was a lot of hope that businesses would produce impressive results despite a total lack of precedence. Investors had high hopes that they would be the first to capitalize on a developing area for growth and profit.

Pioneers of Internet services and technology companies were able to create initial public offerings (IPOs) based almost entirely on ideas, without proving that there was any real market for their services or showing a track record of success. In some cases, new businesses were entering the stock market with literally nothing more than one sheet of paper representing their entire business. Investors were willing to overlook these factors for the chance to become a part of a newly emerging market.

Traditionally, companies and investors follow a very specific business valuation formula in order to determine how much money a young company is worth, what kind of profits and growth it can expect within the coming years and what return on investment (ROI) can be achieved. While valuing a business is ultimately a subjective decision, investors tend to want to see some positive indications before handing over money. However, when it came to the tech bubble, not only did venture capitalists put a significant amount of money upfront in order to facilitate rapid growth, stock market investors also quickly drove up the prices of Internet and technology companies as soon as they made their IPOs.

Dot-com start-up companies quickly saw huge stock price increases despite the fact that they were still developing sites and products and not bringing in any revenue. Eventually, the dot-com bubble burst when investors realized that the companies were not going to turn a profit. Young entrepreneurs went from being millionaires to having businesses that went under because they could not produce enough revenue to stay afloat. However, some of the early dot-com businesses, such as Amazon and eBay, did survive the bursting of the market and went on to become huge successes. Investors who stuck with these companies experienced substantial profits.

Essentially, investors who lost money during the dot-com bubble were engaging in risky investments, but it was a completely new market with unlimited potential. After the bubble burst, many businesses changed the way they paid stock dividend yields, so that businesses and investors are better protected. In addition, as the Internet became a more pervasive part of life, there was less of a rush for investors to capitalize on a new market. For these reasons, it is highly unlikely that markets will experience a similar dot-com bubble and collapse in the future.

RELATED FAQS
  1. Can the Efficient Market Hypothesis explain economic bubbles?

    Learn about the nuanced relationship between the efficient market hypothesis and economic bubbles and the requirements and ... Read Answer >>
  2. When Did the Real Estate Bubble Burst?

    Collapsing home prices from subprime mortgage defaults and risky investments on mortgage-backed securities burst the housing ... Read Answer >>
  3. What did Knight Trading Group do to incur a $1.5 million fine for violating trading ...

    The dotcom boom accelerated many deceitful business practices that first became apparent during the '80s and '90s. Many of ... Read Answer >>
  4. How Does an Efficient Market Affect Investors?

    The efficient market hypothesis refers to aggregated decisions of many market participants. Read Answer >>
  5. How do investors lose money when the stock market crashes?

    Find out how investors can lose money due to stock market crashes. Learn how fluctuating share prices affect overall wealth. Read Answer >>
Related Articles
  1. Investing

    How To Value An Internet Stock

    An academic study, published several years after the peak of the dot-com bubble in March 2000, accurately described just how whacky internet valuations grew until the bubble burst. The study's ...
  2. Insights

    Should the Fed Be More Worried About Asset Bubbles?

    While the Fed should be concerned that assets bubbles might impact economic stability, monetary policy is not the best tool to mitigate this threat.
  3. Insights

    How Do Asset Bubbles Cause Recessions?

    Understand how asset bubbles often lead to deep, protracted recessions. Read about historical examples of recessions preceded by asset bubbles.
  4. Insights

    Lessons Learned: Comparing The Japanese And U.S. Bubbles

    Find out what the Japanese and U.S. bubbles can tell us about recovering from financial chaos.
  5. Insights

    Some Industries Are More Bubbly Than Others

    Investors who want to avoid future bubbles should learn from the past in order to protect their investments.
  6. Insights

    5 Ways To Spot The Next Stock Bubble - And Avoid It

    Playing a market bubble could pay off, but it carries a lot of risk. Avoiding it could be the way to stay profitable.
  7. Investing

    These Internet ETFs Have The Highest Earnings in 2017 So Far

    The technology sector is set to receive the most capital in 15 years.
  8. Financial Advisor

    Is the Stock Market Crashing? 5 Signs to Consider

    Learn about some signs of a potential stock market crash including a high level of margin debt, lots of IPOs, M&A activity and technical factors.
  9. Investing

    Nvidia's Stock Signals Techs Near Bubble Like 2000

    Tech darling Nvidia is up 1,158% in 3 years and trades 33% above its 200-day moving average.
RELATED TERMS
  1. Internet Bubble

    The internet bubble, also known as the dot-com bubble, is a textbook ...
  2. Dotcom

    A dotcom is a company that embraces the internet as the key component ...
  3. Bubble

    A bubble is an economic cycle characterized by rapid expansion ...
  4. Speculative Bubble

    A speculative bubble is a spike in asset values within a particular ...
  5. Bubble Company

    A bubble company is one whose valuation greatly exceeds that ...
  6. Mississippi Company

    The Mississippi Company refers to an example of a famous speculative ...
Trading Center