Of Crashes and Bubbles

Let's beef up our vocabulary!  Do you know the difference between a crash, a bubble, a depression, and a correction?  We often hear these terms in business news and it can get quite confusing at times.  Read on to enrich your vocabulary. 


A bubble is a type of investing phenomenon where in investors put so much demand on something, like a stock, that they drive the price up beyond its actual worth.  It is likened to a soap bubble because like blowing bubbles, they appear as though they will rise forever, but since they are not formed from anything solid or substantial, they eventually pop.  And when they do, money invested gets blown away in the wind as well.


A crash is a significant drop in the TOTAL VALUE of a market.  It usually occurs after a bubble has popped.  Once a bubble pops, majority of investors try to flee the market at the same time and consequently incur massive losses.  And in order to prevent further losses, investors go into panic selling, contributing greatly to the decline of the market.  The market then crashes affecting everyone.  It is important to note that not all bubbles lead into a crash.

Typically, crashes in stock markets are followed by depression.


It is important to note the distinction between a crash and a correction.  As a general rule, a correction should not exceed a 20% loss of value in the market.  It is supposedly the market's way of slapping some sense into overly enthusiastic investors.

source: www.investopedia.com

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