Definition
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.
Explanation
Also known as a market bubble, an economic bubble is formed when investors hold unrealistic views of an asset's value. Typically associated with a financial market, such as the stock market, the term can also apply to economies, an individual security, or a specific business sector. An economic bubble's lifecycle occurs in two phases:
Bubble Formation: investors push the price of an asset upwards, well beyond its fundamental value.
Bubble Burst: investor confidence in, or sentiment towards, the asset wanes resulting in a rapid sell off of the asset and a corresponding drop in price.
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 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.Moneyzine EditorJanuary 16th, 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 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
