CONSTRUCTING A BUBBLE



Although the heart of the bubble is focused on inflated asset prices, the events which are spuriously rising prices are very real. Bubbles can be set off by factors like rising interest rates free flowing credit and new, creative technological developments.



The bubble starts its tenuous development once people start catching the new fever and prices take baby steps upward. Prices start increasing momentum as more people are jumping upward rally. Increasing media coverage, which draws even more motivated participants hoping to join this opportunity.



High on rapidly rising inflation, investors are wary of the wind and aggressively pour more money into the mix, bringing prices to exorbitant rates. This was seen at the height of the Dot-Com-Bubble, when the IT and software companies prices increasing day by day.



With market values out of balance, traders, analysts, and talking heads reason to justify continued investment.



When markets reach their peak, smart investors know that it's time to get out and try to clear money before everyone else gets caught up. But when markets behave irrationally, it's nearly impossible to make a clean gateway. All it takes is the tiniest pin to burst a bubble, to avoid its growth instantly and forever, and to set off its inevitable unraveling.



Now there's widespread hysteria. The bubble bursts as prices plummet faster than they rose. Investors are desperately trying to sell off their overpriced assets before they are completely worthless. With more sellers than buyers, prices reach the bottom of the rock. Individual and institutional investors, market as a whole, and even economics as a whole, can collapse as the bubble bursts.





DOT-COM-BUBBLE



The internet was only beginning to grow. Personal computers were a part of everyday life just starting. It was in the 1990's and the technology was so new that nobody could forecast how our world would change.



The enthusiasm Dot-Com companies has been increasing and share prices have therefore increased. Most of these latest Dot-Com stocks have appeared on NASDAQ, and in only five years, the trade value has risen five times over.



Suddenly some of the largest technology companies (such as Dell, Acer) began to sell their shares and investors became very anxious, selling their tech shares in fear. Many of those Dot-Com companies were under and their shares were worthless without the steady inflow of capital. Similarly, trillions of dollars from creditors simply vanished.





HOUSING BUBBLE



In 2008, almost a third of the value of the major financial markets in the United States was lost. As the debacle over sub-prime mortgages grew, the economy of the country was stuck. Although the US housing bubble was not linked to the market directly, its collapse had a big impact on the behavior of the stock exchange.



Housing Bubbles not only cause a major real estate crash, but they also have an important effect on people of all classes. They can push people to seek ways of paying their mortgage through different schemes, or they can dig into pension accounts to make themselves eligible reason for people to end up losing their savings.



The infamous bank failures over and above the struggling mortgage and housing industry forced the nation into a recession in the winter of 2007, leading to a fall in the stock market.



The Industrial Average of Dow Jones decreased to two years by mid 2008, and fell gradually. As investors have run out their capital from the stock exchange, stock prices have fallen devastatingly.



Key Points



(i) A housing bubble reflects a permanent but provisional state of highly priced and unchecked housing market speculation.



(ii) Down through cash inflows, loose lending conditions and government policies to support hoe owned homes, the US experienced a major Housing Bubble in the 2000s.



(iii) A housing bubble is a transient phenomenon occurrence and it can occur under any market conditions.





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