At WiseGEEK, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.

Learn more...

What is a Stock Market Bubble?

Jacob Queen
Jacob Queen

A stock market bubble is a situation where the market has risen too high. People often expect stock markets to reflect a realistic value of different companies or commodities. According to experts, this usually happens eventually, but during the process, there are often peaks and valleys. The peaks are usually called bubbles, and when they "pop," there is often a deep valley where the stocks may even become undervalued. This entire process is based primarily on group psychology, and learning to predict bubbles can help investors earn more efficiently.

The start of a stock market bubble is usually based around a particular industry or product becoming extremely popular for some reason. This may often be something new and trendy that has the world’s attention at that particular time. For example, one of the more famous stock market bubbles was related to the Internet boom during the late 1990s and early 2000s. There were tons of companies to invest in, and many investors thought they could make a huge profit by putting lots of money into them. In the end, some of those companies ended up being very successful, but most of them were vastly overvalued, and some investors lost a fortune when everything crashed.

A bubble is when the stock market has risen to unsustainable highs.
A bubble is when the stock market has risen to unsustainable highs.

A stock market bubble may pop for a lot of different reasons, but generally the end is just like the beginning in the sense that it is driven by psychology. Usually, a large number of people will begin to realize that the stocks they're holding are overvalued, and they decide to sell. This selling triggers more selling until there is a massive sell-off. During this process, the stocks may go from being extremely popular to extremely unpopular. By the end of the process, the market may actually be oversold, but some individual stocks will often be ruined forever by the crash.

According to many experts, it is actually possible to make very good money during a stock market bubble, but it takes a lot of finesse. The key is for people to realize that they’re involved in a bubble and that the stock prices they’re seeing aren’t actually based on anything real. At that point, the person can potentially sell and get out of the market before the price starts going down significantly. To get the best of this situation, investors need a great deal of market understanding because it’s very easy to simply become part of the herd mentality without even realizing it.

You might also Like

Discuss this Article

Post your comments
Forgot password?
    • A bubble is when the stock market has risen to unsustainable highs.
      By: Scanrail
      A bubble is when the stock market has risen to unsustainable highs.