bubble

Bubble

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.

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bubble

A price level that is much higher than warranted by the fundamentals. Bubbles occur when prices continue to rise simply because enough investors believe investments bought at the current price can subsequently be sold at even higher prices. They can occur in virtually any commodity including stocks, real estate, and even tulips.

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bubble

A period of rapid expansion and price increases, followed by a market slowdown and contraction.Many analysts claim a real estate bubble exists in some cities characterized by a price growth of more than 30 percent per year.Other analysts disagree.(For housing cost information in various states and cities, see the Office of Federal Housing Oversight Web site at www.ofheo.gov, and click on House Price Index.)