A combination of forces such as rapidly rising stock prices, market confidence that companies have great potential for future earnings, individual speculation around every corner, and widely available investment capital create an environment that inflates. stock prices and leads to a situation. This is called a stock bubble.
The most common question that comes to mind when talking about bubbles is what actually causes bubbles to form and what causes them to burst again. Interestingly, it has been observed that greed and only greed cause bubbles and then fear causes it to explode. We are all aware that the stock market is predominantly governed or controlled by greed and fear.
A bubble will form without causing much ripple due to the influence of what is known as the grazing effect. When a hype starts in the stock market, everyone hears about the new stocks on the market and tries to buy as much as they can. We sit back and enjoy as profits skyrocket with skyrocketing prices. So we get more and more greedy and we wait and watch, but we forget to sell.
Even the stock gurus and analysts who dominate the media add to the hype and present their latest stock picks. They show the pink side of the image with the help of complex research analysis, eye-catching graphics, and attractive graphics. But what they don’t do is remind people to sell and take home the profits. Therefore, it takes time for the news of the sale to reach the vine.
However, by that time, the big investors or, as it is called, the smart money segment will have sold the shares and collected some of those unrealized gains on paper alone. So the peak is reached when everyone is in and now the rapid recession begins when panic selling begins and stock prices fall. This is exactly when the stock market bubble is said to have burst.
Investors small and large who buy and hold every day get frustrated and walk away from the stock market. They walk away from the stock market determined to wait until the psychology of the market has regained its makeup or never returns. But the illusions of euphoria, the joys of taking home high returns are too seductive for them to ignore the stock market for long. They return like this and with a hope similar to that of the moment of the formation of the previous bubble and repeat the mistake of investing when the market rises again and thus contributes to the next bubble.
During bubble times, you must maintain higher cash reserves than you normally have. To profit from a bubble situation, you need to be careful and smart. You should invest only in those stocks that are not overvalued. It is easy to know when you are in a bubble situation, but it is difficult to calculate the time of the explosion. Bubbles can take a long time to burst, and if you hold them too long, continuous inflation can lead to serious losses. Investing in bubbles is certainly different from investing in the bull market. Play safe and put only a fraction of your money in the bubble game.
There are several examples of large stock bubbles that continue to intrigue economists around the world. To highlight some exceptional bubbles, we must locate examples such as the technology or dot com bubble that peaked in 2000, the oil bubble that peaked in July 2008 when oil prices shot up to $ 147 per barrel and then the housing bubble that burst. in 2007-2008.
However, instead of playing too cautiously or being too cautious with these bubbles, one should simply take some calculated and unprecedented risks and try to get something out of the bubble situation.
