A situation in which
prices for
securities, especially
stocks, 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. Bubbles usually occur when
investors, for any number of reasons, believe that
demand for the stocks will continue to rise or that the stocks will become profitable in short order. Both of these scenarios result in increased prices.
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.