Posted in Finance, Accounting and Economics Terms, Total Reads: 161
Definition: Bubble Company
A Bubble Company is one whos valuation exceeds more than its real essential value by a great margin. A company becomes a bubble company when it’s valued much more than it should and investors start buying its stock in anticipation of future earnings.
A bubble company is not able to provide the earnings as expected by the analysts, which leads them to start cooking its books to present an expected bottom line for its investors. When the bubble bursts, these companies usually go out of business or their share prices drop massively.
One of the most famous example of a bubble is the ‘Tulip mania’ of 1643-1638, where the people of Holland started associating high values to tulips. Initially only the rich and wealthy people could buy the tulips but after that the middle class started buying tulips as their prices started increasing. People often mortgaged their houses and businesses to buy tulips in order to resell them at a higher price. In 1637 the confidence of the people evaporated from these tulips and the bubble burst.
Another example a bubble is the bull market of USA (1924-2929). During the 1920’s there was high availability of credit due to a change in economic stance which led to high borrowing by industries as well as people. Americans used the credit to finance production of automobiles and products of new technology. There was massive consumption and investors started using credit to purchase stocks as well. The demand for Radio Stocks (a new technology) was such that the stocks surged by 400% in 1928 alone. In October 1929, the market started declining leading to the crash of 1929.