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Types of Financial Bubbles & Their Impact on the Stock Market

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Information is critical for all investors, and this is particularly true for anyone interested in stocks. Investing in stock is a lucrative venture and is one of the ways to earn huge profits. However, the prices of stocks keep on shifting – bubbles and crashes are also common. And you must understand how to forecast price changes to benefit from your investment. There are different types of Financial Bubbles, read this post for more details

What is the Financial Bubble?

A bubble is an economic cycle, usually an uptick in the value of a financial asset. The price tag isn’t a true reflection of the actual cost. Bubbles occur when asset values appreciate due to speculative demand. But, the prices come down once a bubble burst happens. For instance, the stock market crash of 2020 was one of the fastest falls in the global stock market. It happened between February and April 2020 and was one of the devastating crashes in the stock market’s financial history.

What Are the Different Types of Financial Bubbles?

1. Market bubble

A market bubble happens when the value of stocks rises due to high expectations of resale value. The stock market experiences increased stock prices, and a bubble burst occurs when the stock prices suddenly go down.

2. Commodity bubble

A commodity bubble happens when the price of a commodity or different commodities escalate. The price in case results from an increased demand which exceeds the supply of a particular item. The high demand then inflates the price to abnormally high levels.

3. Stock market bubble

A stock market bubble occurs when the prices of stocks rise rapidly. However, the price is prone to crashes, particularly when trades feel that the price bubble is highly inflated.

4. Economic bubble

An economic bubble is also known as an economic boom. It happens when the economy expands at a swift and unsustainable rate resulting in inflation. In most cases, it occurs when demand grows faster than the productive capacity. The price rise is based on conflicting views about the future. This type of boom is unsustainable and has a strong connection to market bubbles.

5. Credit bubble

A credit bubble is a market phenomenon characterized by a surge in asset prices to a level higher than the fundamental asset value. In most cases, such a bubble is hard to detect due to disagreements over the asset’s exact value. A credit bubble also happens when there’s increased growth in consumer or business credit. Credit bubbles lead to increased availability of entrepreneurs and happen due to the expectations of future credit.

What Happens After a Stock Market Bubble?

Stock market bubbles push the price of stocks very high. But the costs are mostly unstable, and later a bubble burst happens. When the prices start coming down, investors quickly sell their stocks to avert losses. 

How can you predict a stock market crash? One of the apparent signs of a stock market crash is the rapid rise in stock prices. Most stock prices hit high levels before a crash, which happens when most investors invest in the stock market. If you’re new to stock investments, take time to learn the market trends before investing. Also, know the different types of price bubbles and their impact on stock prices. By so doing, you’ll invest wisely and will likely gain more from your investment.

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