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Bubble

A bubble is a period in which a given asset class becomes substantially overvalued.

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A stock market bubble occurs when people are happily paying way more for stocks in a certain sector than they are worth given the fundamentals of the businesses. So the prices keep going up as excitement and demand for ownership in the sector builds until ... something happens ... and the bubble bursts and prices plummet. If it didn't pop, it wouldn't really be a bubble, right?

The bursting of a bubble frequently marks the beginning of a bear market or a significant correction. Recent bubbles include the dot-com bubble of the early 2000s and the housing bubble of 2007-2008. There's also the famous Dutch tulip bulb bubble of the 1600s. Tulip bulbs reached astronomical prices at the time, until demand crashed, and fortunes were ruined.

A bubble is frequently marked by what former Federal Reserve Board chairman Alan Greenspan termed "irrational exuberance" -- a belief that prices would keep going up without any concrete reason for this belief.

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