Economics is all about learning from previous market movements, and trying to predict the next big move.
Let’s look at the historic pattern of bubbles.
Bubble: over-demand on a stock drive prices beyond actual worth based on performance of the underlying company.
Crash: Significant drop in the value of a market where a majority of investors are trying to flee the market.
The process results in panic selling, stocks losing value and investors losing money which curtails future investment.
This can lead to economic depression.
Stages of Bubbles:
1.) Stealth phase – “smart money” enters.
2.) Awareness phase – Institutions begin to invest.
3.) Mania Phase–Media broadcasts to general public who invest. Speculation rises, prices soar.
4.) Prices collapse.