What is a “Bubble”?
The Time a Flower Crashed an Economy
What Is a Bubble?
A bubble is when prices of an asset (think stocks or real estate) experience a rapid increase in prices, followed by a sudden and significant decrease in prices.
How Do Bubbles Form?
Bubbles occur when investors begin to buy assets without considering their economic value. They are buying because they plan on quickly selling it to the next investor at an inflated price. Think of it as “house flipping” in the stock market, except you haven’t actually done any repairs or added any value to the house. You bought the house, did no rehabbing or value-adding and plan to “flip” it to the next buyer for a profit.
Once this starts happening, investors get greedy and they want to get in on the action, carrying the price of the asset even further beyond what the underlying financial numbers would suggest it is worth.
Think of it as “house flipping” in the stock market, except you haven’t actually done any repairs or added any value to the house.
