How to Spot a Financial Bubble - City IndexBy City Index, PRNE
Monday, July 11, 2011
LONDON, July 12, 2011 -
Business-oriented social network LinkedIn recently joined the
New York Stock Exchange. Valued at £9 billion, its shares opened
with a roar reminiscent of the infamous dotcom bubble, doubling in
value on their first day.
A characteristic of bubbles is that they tend to be identified
only after they have burst, so spread betting provider City Index
looks at the five stages of a bubble, as identified by American
economist Hyman Minsky.
A displacement occurs when investors get enamored by a new
paradigm, such as an innovative href="www.investopedia.com/articles/stocks/10/5-steps-of-a-bubble.asp">
new technology or interest rates that are historically low.
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.
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.
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.
In the panic stage, asset prices reverse course and descend as
rapidly as they had ascended. Investors and speculators, faced with
calls and plunging values of their holdings, now want to
liquidate them at any price. As supply overwhelms demand, asset
prices slide sharply.
About City Index:
Today more and more individual traders are discovering the benefits
of derivatives, and many of them are discovering them through a
City Index href="www.cityindex.co.uk/trading-platform/">trading
As a group, we transact in excess of 1.5 million trades every month
in over 50 countries. We provide access to a wide range of
instruments including margined foreign exchange, href="www.cityindex.co.uk/cfd-trading/what-is-cfd-trading.aspx">
contracts for difference ( href="www.cityindex.co.uk/cfd-trading/">CFDs) and, in
the UK, href="www.cityindex.co.uk/spread-betting/">financial spread
We constantly look to improve the performance of our platforms and
expand the range of services we provide. The result is that our
customers benefit from innovative trading tools with transparent
pricing, competitive spreads, and a high standard of customer
Contact: Joshua Raymond, City Index, +44(0)20-7107-7002, joshua.raymond[at]cityindex.co.uk
Tags: City Index, July 12, London, United Kingdom