According to analysts, there is an imminent danger of a stock market bubble bursting due to the overwhelming amount of stock market trades that have occurred in the last year alone. Financial advisors caution that regardless of whether these forecasts pan out or not, more people should become aware of market crashes and what defines a bubble. These definitions are no longer lofty concepts that only “expert” investors should know; they are real-world phenomena that affect everyone, whether everyone realizes it or not.
Thus: a bubble describes an investing phenomenon which occurs when investors place too much demand on a specific stock or set of stocks. Investors drive the price of these stocks beyond any reasonable or accurate thought (to the point where it is no longer a good reflection of the company’s actual worth). These bubbles initially seem to blow up forever, but — as with a bubble — they’re insubstantial, they will eventually pop. The “higher” these bubbles rise, the more devastating the crash. It is typical to see market bubbles burst to dissipate millions of dollars.
These bursts are called market crashes, which are significant drops in the total value of the entire market. These crashes create a situation of panic, with many investors often struggling to gain back their losses. Different market crashes involve a myriad reactions, but the most general feeling is one of urgency. The panic that sets in usually leads to massive selling, which eventually crashes even more. In a domino effect, stock market crashes are followed by a depression.
There are other nuances involved in either definition but these general outlooks should at least be understood — especially as the patterns for a stock market bubble are being evidenced in current events.