Stock Market Bubble .

December 24, 2020 By Swapnil Suryawanshi

stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation.

Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly predictable experimental markets.

History :

Further information: Financial history of the Dutch Republic and Tulip Mania

Historically, early stock market bubbles and crashes have their roots in financial activities of the 17th-century Dutch Republic, the birthplace of the first formal (official) stock exchange and market in history.[5][6][7][8][9] The Dutch tulip mania, of the 1630s, is generally considered the world’s first recorded speculative bubble (or economic bubble).

Is there a bubble in the stock market :

The stock market isn’t a bubble, but parts of it are on fire. So far in 2020, the NYSE FANG+ index of giant technology stocks is up 78%. … The financial use of “bubble” originated centuries ago to describe massive speculation that inflates market prices to the bursting point.

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What does a bubble mean in the stock market :

Rapid escalationA bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. … During a bubble, assets typically trade at a price, or within a price range, that greatly exceeds the asset’s intrinsic value (the price does not align with the fundamentals of the asset).

What happens after a stock market bubble :

This in turn pushes the stock price higher, which kicks off a new round of buying. The stock price jumps to unheard-of levels and keeps going. But when supply catches up to demand or the new idea proves a bust, stock prices collapse. The bubble bursts as investors panic and sell their stock at fire-sale prices.

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