Bubble

All bubbles eventually burst - whether it be those found in soap powder, the U.K. housing market or those associated with the stockmarket . Unreasoned and excessive buying of shares in a company that is financially weak, and/or becomes overvalued, will increase the market price of its shares to unsustainable levels.

The herd instinct among brokers and investors in the stockmarket leads share (and other) markets to rise - far more than people expect - and then fall - far more than those same people expect!

The 'rising' phase of the upturn tends to become an increasing 'buying frenzy'. Investors tend to increasingly believe if they don't 'buy now' they'll miss out and be forced to pay even higher prices later.

Older brokers ought to know better if they've been around for previous crashes, but even they invariably get caught up in wild exhuberance. You know something is becoming 'a bubble' when

• people start buying anything (good and bad assets)
• comparisons with previous market crashes are dismissed with the justification 'the economic conditions are different this time'!

A bubble in the U.K. housing market burst in the late 1980's, taking prices down by 30% or more in some areas over the next six or so years.

The most famous stockmarket bubble was the South Sea Bubble of 1720. Stocks in the South Sea Company soared spectacularly, only to crash equally spectacularly.

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Last Updated: May 2007 © Moneyextra.com

Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.