You don’t have to be an expert in Financial Trading to know that a boom becomes a bubble and a bubble eventually bursts. The general public, which was once ignorant of this element of Financial Trading, is now painfully aware of it due to such economic phenomena as the dotcom bubble and the housing market bubble, which both spectacularly burst.
So, to ensure that you don’t become a statistic the Academy of Financial Trading has put together this comprehensive guide to booms, bubbles and busts. How do they happen, what are their consequences and how can you spot them?
Let’s start with a ‘boom’. You can define a financial boom as a period of time in which sales of a particular product or business activity increase at a rapid pace. This could happen for a number of reasons; technology advancements, social and cultural shifts, political manoeuvring, greater exposure of the product, celebrity endorsement, positive press attention etc.
This all basically comes down to the fact that the particular product or business activity in question has seen positive attention, or an advancement of some sort and has got people talking. The more people talk about it, the easier it is to clue into the fact that it is either booming or about to boom, as word of mouth, either physically, or more often these days, online, will naturally stimulate financial interest in the subject being talked about once it’s benefits are highlighted.
Now we get to the bubble, which is what the boom turns into. When it comes down to basics, a bubble is when the product that has undergone a financial boom on the market starts trading at prices that, by general consensus, exceeds it’s real value. This is the point where prices for the commodity rise to unbelievable levels because investors forget the reality as the boom encourages them to further invest, creating the situation where the commodity is attributed more value than it is worth on the market. This can be identified when you start questioning the hype. It’s a common sense thing, do your research and find out what the commodity is originally priced at and if its market value is climbing to a ridiculous level in comparison, you’ve got a bubble on your hands.
However, all bubbles burst. A bust is when the bottom falls out from under the investor as the previously high prices for the commodity in question fall rapidly. This culminates in a time where the economic growth of the product contracts, often to below the level it sat at before the boom, as the market for the product has been saturated, and less people than ever want to buy it, and consequently invest in it. Busts are the hardest thing to identify; they seem to happen so suddenly. Nobody saw it coming with the dotcom and housing market booms. However one way would to think of the product like a balloon. The boom is when it beings to have air pumped into it and the bubble is when it begins to exceed its prescribed volume. You can identify a bust by looking for the strain, like with a balloon, where the market seems to be bearing up under increasingly unfavourable circumstances.
As far as booms, bubbles and busts are concerned, only engage in the whole process if you are very confident in your abilities to play the Financial Trading game and get out well before a bust could possibly occur. If you have doubts, listen to them, get out straight away.