5 Stages of Financial Bubbles

What is a financial bubble? What does it do? How to be prepared for it?

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What Is a Bubble?

A financial, economic, or asset bubbles are situations where the asset prices are much higher than the asset could justify. It could also be described as prices that strongly exceed the asset’s reasonable value. This may include an individual stock, a financial asset, a sector of a market, or many others.

5 Bubble Signs That Should Make You Cautious

Financial bubbles fit into 4 basic categories:

1. stock market bubbles (equities)
2. asset market bubbles (other industries or sections of the economy than equities market)
3. credit bubbles (a sudden increase in loans)
4. commodity bubbles (an increase in commodity prices)

The bubbles are usually deceptive and unpredictable. The stages are vital for understanding and being prepared for these kinds of bubbles. There are 5 stages: displacement, boom, euphoria, profit-taking, and panic.

Tulip Price Index

5 Stages of a Bubble

1. Displacement: A stage where new technology or a product amazes people and pushes them to purchase it.
2. Boom: As more buyers enter the market, prices exponentially increase, and the asset attracts widespread media.
3. Euphoria: Prices reach extreme levels during this phase, the cation is thrown.
4. Profit-Taking: People who understand the bubble is about to burst sells their asset and take a great deal of profit.
5. Panic: When people realize everyone is selling, a panic occurs. Asset prices descend as rapidly as they had ascended.