| Bubble | |
 1. An economic cycle characterized by rapid expansion followed by a contraction. 2. A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs. 3. A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts. |
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 Bubbles form in economies, securities, stock markets and business sectors because of a change in the way players conduct business. This can be a real change, as occurred in the bubble economy of Japan in the 1980s when banks were partially deregulated, or a paradigm shift, as happened during the dotcom boom in the late '90s and early 2000s. During the boom people bought tech stocks at high prices, believing they could sell them at a higher price until confidence was lost and a large market correction, or crash, occurs.
Bubbles in equities markets and economies cause resources to be transferred to areas of rapid growth. At the end of a bubble, resources are moved again, causing prices to deflate. Thus, there is little long-term return on those assets. |
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 The Greatest Market Crashes - From a tulip craze to a dotcom bubble, read the cautionary tales of the stock market's greatest disasters. How Investors Often Cause The Market's Problems - Investors of course are human, but find out here how our bad habits can cause market turbulence. The Madness Of Crowds - When faced with the puzzling yet undeniable power of the crowds, the rational trader is left with some perplexing questions. Understanding Cycles - The Key To Market Timing - You need to understand the various phases of the market cycle to avoid bubbles and also maximize your returns. |
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