Definition
The term dot-com bubble refers to the rapid increase in the value of companies conducting business in the technology sector. The dot-com bubble expanded from the years 1995 through 2000, with the Nasdaq Index rising from around 1,000 to just over 5,100.
Explanation
The dot-com bubble is an example of an economic bubble. These bubbles are formed when investors hold unrealistic views of an asset's value. The lifecycle of a bubble occurs in two phases, starting with a rapid expansion of the prices of assets. The cycle ends when the bubble bursts, and the value of the same assets fall quickly.
The dot-com bubble was a result of extreme investor speculation, during which the value of companies in the internet sector reached levels not justified by their fundamentals. Investors recognized the potential growth opportunities the internet possessed, and venture capital funds were hoping to fuel that growth with an infusion of money. Unfortunately, many of these investors focused on the revenue potential of these companies, and ignored the fact they were not earning any profits.
When investors realized many of these companies may never produce adequate earnings to satisfy their extreme valuations, the bubble burst and the Nasdaq would fall to 1,114 in October of 2002. It would take another 15 years for the Nasdaq to once again hit 5,000.
Related Terms
The term market crash is used to describe a sudden decline in stock prices across a significant number of business sectors, resulting in a dramatic loss of investor wealth. Market crashes are oftentimes preceded by a stock market bubble.
Moneyzine EditorNovember 6th, 2024
The term catalyst refers to a disclosure that significantly impacts the value of a security. Catalysts can positively or negatively affect a security's value.Moneyzine EditorNovember 6th, 2024
The term black swan event refers to an incident of immense impact, which was not anticipated, and has a random probability of occurring. Only recognized in hindsight, individuals assume the risk of a black swan event when they invest in financial markets.Moneyzine EditorNovember 6th, 2024
The term economic bubble refers to a condition where the price of an asset moves into a range that significantly deviates from its fundamental value. Economic bubbles typically occur because of overly optimistic, or unrealistic, investor sentiment.Moneyzine EditorNovember 6th, 2024
The term gray swan event refers to an incident of sizable impact, which can be anticipated, but has a relatively low probability of occurring. Often recognized in hindsight, individuals assume the risk of a gray swan event when they invest in financial markets.Moneyzine EditorNovember 6th, 2024
