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stock market bubble

A combination of forces, such as rapidly rising share prices, market confidence that companies have great potential for future earnings, individual speculation around every corner, and widely available investment capital, create an environment that it inflates stock prices and gives rise to a situation called a stock market bubble.

The most common question that arises in our minds when we talk about bubbles is what actually makes the bubbles form and then what makes them burst again. Interestingly, it has been observed that greed and only greed causes bubbles and then fear lets them burst. We are all aware that the stock market is efficiently governed or controlled by greed and fear.

A bubble will form without causing much ripple due to the influence of what is known as the herd effect. When a hype starts in the stock market, everyone hears about the new stocks on the market and try to buy as much as they can. We sit back and enjoy as profits skyrocket with skyrocketing prices. So we get more and more greedy and wait and watch, but forget to sell.

Even the stock gurus and analysts who dominate the media are jumping on the hype and throwing out their latest stock picks in a modern way. They show the bright side of the picture with the help of complex research analysis, eye-catching charts, and attractive charts. But what they don’t do is remind people to sell and take home the profits. Therefore, it takes time for the news of the sale to reach the rumor mill.

However, by that time, the big investors or the so-called smart money segment will have sold the shares and cashed in some of those unrealized gains on paper only. Thus, the peak is reached as everyone is in and now the rapid recession begins as panic selling begins and stock prices fall. This is exactly when the stock market bubble is said to have burst.

Small and large investors who buy and hold every day get frustrated and walk away from the stock market. They walk away from the stock market with the determination to wait until the psychology of the market has regained its composition or never return. But the illusions of euphoria, the pleasures of bringing home high yields, are too seductive to ignore the stock market for long. Therefore, they return and with a similar hope as at the time of the previous bubble formation and repeat the mistake of investing when the market rises again and therefore contributes to the next bubble.

During times of bubbles, you must maintain higher cash reserves than you normally do. To profit from a bubble situation, you need to be careful and smart. You should invest only in those stocks that are not overvalued. It’s easy to tell when you’re in a bubble situation, but it’s hard to time the burst. Bubbles can take a long time to burst, and if held too long, continued inflation can lead to serious losses. Bubble investing is certainly different from bull market investing. Play it safe and put only a fraction of your money into the bubble game.

There are several examples of large stock market bubbles that continue to intrigue economists around the world. To highlight some exceptional bubbles, we should cite examples like the tech or dot com bubble that peaked in 2000, the oil bubble that peaked in July 2008 when oil prices shot up to $147 a barrel, and then the housing bubble that burst 2007-2008.

However, instead of playing too cautiously or being overly cautious with these bubbles, one should take some unprecedented and calculated risks and try to get something out of the bubble situation.

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