The Bursting of a Market Bubble Explained!!
A market bubble is formed when an economic market cycle of asset prices are inflated way above the rational underlying book value of the asset. Craze and overexcitement are the emotional drivers behind the formation of asset bubbles. The word bubble implies that at this point it is only a matter of time before the asset goes tumbling in price, which is known as the "bursting of the bubble."
When prices begin to rise rapidly, sooner rather than later, there will be no more investors willing to pay the inflated prices.
Bubbles are formed in all types of asset classes to include, stocks, index funds, real estate, and other business sectors when a large number of investors all get excited about the perceived endless rise in the value of an asset. As a result of this change in investor behavior, demand for the asset skyrockets.
Investors are only willing to pay up to certain price point for an asset before it becomes perceived as highly overvalued. This is when the basic function of supply and demand kicks in combined with human emotion. At the first signs of a steep drop in value, the owners of the asset begin to panic and rush to sell their remaining holdings before they lose any more money.
At this point, the supply and demand momentum swings from one side to the other where you now have more sellers on the market than there are willing buyers.
From there, the asset price continues to drop, and drop, and drop until it becomes cheap enough to entice more buyers. This, in effect, is when the bubble has bursted as the asset price takes a nose dive.
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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.
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