Market bubbles have been responsible throughout investment history for making many people extremely wealthy and suddenly letting the virtual helium out of those same investment values.

What is a Market Bubble?

A market bubble is a state of a market sector or economy in which investments are experiencing a boom of activity. Often a stock or asset’s value balloons based on human behavior much more than the actual value of the stock. What is clear about market bubbles is that they can continue to produce euphoric periods of investing while at the same time there is clear evidence that at some point the investment bubble will burst.

Driving a Bubble

Market bubbles are nothing new and many experts do not know why they persist. There are clear givens about bubble behavior. Experts know that bubbles can drive up investment values, well beyond what the market should be able to bear. Also, there is a definite point at which a bubble bursts, bottoming out investment values or bringing them back to a state of normalcy.

While many experts do not understand what precipitates market bubbles, many psychologists attribute group behavior to the activity of market bubbles. Frenzied buying can often be the result of investors acting on others’ enthusiasm, without regard for their own reason or good sense.

The Dot Com Bubble

The 1990s Silicon Valley “dot coms” were a perfect example of a market bubble gone haywire. The billions of dollars invested in little known companies with not much value or reputation backing them up resulted in ridiculous monetary losses when their dot com bubble burst.

1929 Stock Market Crash

There has been much theorizing over what drove the market to crash in 1929, leading to the Great Depression. However, many financial historians believe that a kind of bubble effect—intense stock investment, market over-confidence and overvalued stocks—might have, in fact, precipitated the 1929 Stock Market Crash.

Bubble Risk

Obviously, bubbles burst. There is a reason why bubbles are termed as such. Many economists warn that bubbles can be a prelude to stock crashes, or at least a serious downturn to the economy. This fear, they say is what continues to drive investment bubbles upwards, while at the same time threatening deeper losses.

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