Bubble Theory

Bubble theory

A theory under which security prices sometimes move wildly above their true values, or the price falls sharply until the "bubble bursts". It is also possible for a bubble to deflate gradually.

---

Bubble Theory

A theory of investing stating that prices for securities, especially stocks, occasionally rise far above their actual value. This trend continues until investors realize just how far prices have risen, usually, but not always, resulting in a sharp decline.

A famous example of a bubble is the dot-com bubble of the 1990s. Dot-com companies were hugely popular investments at the time, with IPOs of hundreds of dollars per share, even if a company had never produced a profit, and, in some cases, had never earned any revenue. This came from the theory that Internet companies needed to expand their customer bases as much as possible and thus corner the largest possible market share, even if this meant massive losses. NASDAQ, on which many dot-coms traded, rose to record highs. This continued until 2000, when the bubble burst and NASDAQ quickly lost more than half of its value.