A combination of forces, such as ever-faster stock prices, market confidence that companies have strong potential to make future profits, individual speculation on every corner, and widely available investment capital create an inflating environment. stock prices and gives rise to a situation which is called the stock market bubble.
The most common question that comes to mind as we talk about bubbles is that what actually causes the bubbles to form and then what makes it explode again. Interestingly, it was noticed that greed and only greed causes bubbles and then fear lets it out. We are all aware that the stock market is dominated or controlled mainly by greed and fear.
A bubble will form without causing too many waves due to the influence of what is known as the grazing effect. When a stock market hype starts, everyone gets a new effort in the market and tries to buy as much as they can. We sit back and rejoice as profits increase as prices rise. Then we become more and more greedy and wait and watch, but forget to sell.
Even stock market gurus and media analysts are adding to the hype and launching the latest stock options. They show the pink part of the image with the help of complex research analysis, bright diagrams and attractive graphs. But what they don’t do is remind people to sell and take profits home. Thus, it takes time for the news of the sale to reach the vine.
However, by then, large investors or the so-called smart money segment will have sold their shares and cashed in some of these unrealized profits only on paper. The peak is thus reached as everyone is, and now the rapid recession begins with the start of panic selling and falling stock prices. Exactly when the stock balloon is said to have appeared.
Small and large investors who buy and hold every day get frustrated and shy away from the stock market. He moves away from the stock market with the decision to wait until the psychology of the market regains his composure or he does not return at all. But the illusions of euphoria, the pleasures of making big profits at home are too seductive for them to ignore the stock market for a long time. They thus return with a similar hope as during the formation of the previous balloon and repeat the mistake of investing when the market rises again and thus contributes to the next balloon.
During bubble periods, you should keep larger cash reserves than you normally have. To make a profit from a bubble situation, you need to be careful and intelligent. You should only invest in stocks that are not overvalued. It’s easy to realize when you’re in a bubble situation, but difficult to time. Bubbles can take a long time to explode, and if you hold on too long, continued inflation can lead to severe losses. Bubble investing is certainly different from investing in the bull market. Play safely and only put some of your money into the bubble game.
There are several examples of big bubbles in the stock market that continue to intrigue economists around the world. To highlight some exceptional bubbles, we should find examples such as the technology bubble or dot com that peaked in 2000, the oil bubble that peaked in July 2008, when oil prices reached $ 147 a barrel, and then the real estate bubble that appeared in 2007-2008.
However, instead of playing too carefully or being too careful about these bubbles, you should take some unprecedented and calculated risks and try to get something out of the bubble situation.