Investing During a Bubble

Below, an article by City Index

Financial bubbles can be extremely lucrative for traders, but they can also be extremely dangerous.

If you catch them at the right time, you can ride them to financial success, but stay too long and you may find the bubble bursting underneath you.

Identifying a Bubble

Of course, it is impossible to invest in a bubble without first identifying one.

To aid you, spread betting provider City Index, looks at the five stages of a bubble, as identified by American economist Hyman Minsky.

Investing During a Bubble – Displacement

A displacement occurs when spread betting investors get enamoured by a new paradigm, such as an innovative new technology or interest rates that are historically low.

Investing During a Boom

Prices rise slowly at first, but then gain momentum as more and more participants enter the market.

During the boom phase, the asset in question attracts widespread media coverage.

Fear of missing out on what could be an once-in-a-lifetime opportunity draws an increasing number of participants into the fold.

Investing During a Bubble – The Euphoria Stage

As euphoria takes hold, caution is thrown to the wind and asset prices skyrocket. New valuation measures and metrics are touted to justify the relentless rise in asset prices.

Investing During a Bubble and Profit Taking

By this time, the smart money, heeding the warning signs, is generally selling out positions and taking profits.

But estimating the exact time when a bubble is due to collapse can be a difficult exercise and extremely hazardous to one’s financial health.

Investing During a Bubble – The Panic Stage

In the panic stage, asset prices reverse course and descend as rapidly as they had ascended.

Spread betting account holders and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate them at any price. As supply overwhelms demand, asset prices slide sharply.