Defining bubble means an economic cycle where rapid escalation of market value occurs. It affects the price of assets. This article is discussing the pattern and defining stock market bubble to help traders understand price swings. Bubble in this case, could happen any time. But the rapid escalation mentioned here is when the price exceeds the intrinsic value. This condition does not solely refer to the sudden increase but also quick decrease in value. Thus, there are two types of bubble: crash and bubble burst.
A too enthusiastic market behavior could lead to the surge of asset prices in bubble. This is because, when a bubble occurs assets’ price exceeds the intrinsic value. It means that this price no longer aligns with the asset fundamentals. However, some economists opposed bubble conditions. They believed that bubble do not happen. But the identification of it could take place during the massive drop of prices.
The major cause of bubble could also refer to the changing of investor behavior. But this is still debatable. If bubbles happen in equities markets, it needs to be transferred to area where rapid growth happens. Finally when the resources moved again, it could inflict price to deflate.
The best epitome of bubble throughout history is the Japanese economy in the 1980s. Banks encountered partial deregulation in the 1980s. This becomes the reason why surge of prices in both real estate and stock prices surged wildly in the era. In addition the vase of dot-com in the 1990s also caused a stock market bubble. The major character of it was the too much speculation in internet-related companies.
During the dot-com boom, technology stocks were at high prices. This is because people were confident that they could sell it at a higher price. Later, the market correction occurred, then they lost confidence.
