Reviewed by Sep 28, 2020| Updated on
A bubble is an economic cycle defined by the rapid escalation of asset prices that occurs after a contraction. It is created by a swell in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behaviour.
Upon asset prices reaching the peak, investors may not be willing to buy; a massive sell-off occurs leading the bubble to deflate. Bubbles are formed due to a change in investor behaviour regarding economies, securities, stock markets, and business.
Steps Involved in a Bubble
Displacement: Occurs when investors start to notice a new paradigm, such as historically low-interest rates.
Boom: Prices start to rise, leading to more investors entering the market.
Euphoria: When euphoria hits, and asset prices skyrocket, caution is given.
Profit-taking: It is not easy to predict when a bubble will burst. People who understand the warning signs will make money by selling off positions.
Panic: Asset prices drop as quickly as it rose. Investors would want to liquidate them at any price even when asset prices decline as supply outgrows demand.
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