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. Why Did Dot-com Companies Crash So Drastically?

    The dot-com bubble resulted from a flood of capital into companies with shaky business models. Read Answer >>
  2. 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 >>
  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. Small Business

    Why Social Media Isn't Like The Dotcom Boom

    Many investors see social media stocks as a bubble waiting to burst. Find out why they're wrong.
  2. Investing

    Economic Bubble: Toil And Trouble!

    You might like the idea of profiting from a bubble, but you’d probably like to avoid suffering from its aftermath. Here is how an economic bubble works.
  3. Insights

    Five Of The Largest Asset Bubbles In History

    The five bubbles discussed here were among the biggest in history; their lessons should be heeded.
  4. Investing

    5 Successful Companies That Survived The Dotcom Bubble

    These companies did what many others could not - survived the dotcom bubble.
  5. Investing

    Tech Bubbles: How the Dot-Com Era Differs From 2016 (AAPL, CSCO)

    Pay attention to the escalating valuations of pre-IPO companies in 2016, as several will rise above the $10 billion level before going public.
  6. Investing

    Investing During Market Bubbles and Bursts

    Don’t fear bubbles and don’t avoid certain markets because some people believe they may burst.
  7. 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.
  8. 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.
  9. 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.
  10. 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. Dotcom Bubble

    The dotcom bubble was a rapid rise in U.S. equity valuations ...
  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. Bubble Theory

    Bubble theory is an economic hypothesis that irrational investors ...
  5. Tech Bubble

    Tech bubble refers to a pronounced and unsustainable market rise ...
  6. Housing Bubble

    A housing bubble is a run-up in home prices fueled by demand, ...
Trading Center