What is an economic boom?
As an investor, you may come in contact with the term ‘boom‘. This is an economic concept that is regularly used in the world of investing. Do you not know what a boom is? Read more about this phenomenon in this article.
What is a boom?
A boom is a situation where you see a huge demand for certain products or services. This increased demand can be for a particular investment product as well such as a specific stock. A boom is part of the business cycle of an economy. The business cycle includes the low and high points in the economy.
A boom can occur at one of the many high points in the economic cycle. When the economy is doing well, the demand for specific product and services can increase causing certain shares to rise considerably.
How can you speculate during a boom?
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The result of a boom
If there is a lot of demand for a specific product, a particular service or a specific investment product we can sometimes speak of an economic boom. In the case of a boom, the demand for a product, service or investment product gets so high that the price is often no longer in proportion to the underlying value. This means that you have to pay a lot more for this product, this service or this investment product than it actually is worth.
As a consequence of an economic boom, a bubble in the economy may arise. This does not always happen, but the risk is certainly present. If the price continues to rise and there is no decline, the chance of a bubble is large.
The roaring twenties was a period in which there was a boom.
A boom and a bust
The opposite of a boom is a bust. During a boom, the prices of a product, service or share increase considerably, but during a bust the prices of a product, service or share become very low. If there is a boom in the investment world, you have to pay ridiculously amount for a specific stock. If there is a bust, you can simply snatch it up for a low price.
Especially during a boom it can be wise to sell and a bust can be a good buying opportunity. It is not always wise to follow the crowd blindly, especially when there is a lack of critical perspective.
An example of a boom
To explain the phenomenon even more clearly, we’d like to give an example of a boom in Dutch history. During the Golden Age there was a tulip mania. There was so much demand for tulip bulbs that the price of these bulbs rose considerably. We all know that tulip bulbs are not worth millions of guilders, but during the tulip bulb boom the bulbs were sold for this price.
The tulip bulbs boom could arise because it was very attractive to buy tulip bulbs. Initially, this had to do first with the value of the bulbs, but later also with the social status that it gave the owner. This social status was again caused by the high value of the bulbs. Due to the high demand for tulip bulbs, there was a so-called Tulip Mania. Eventually, tulip bulbs were worth millions of guilders. Only after a correction did the bulbs regain their original value and the tulip bulb boom had passed by.
Question: What do you think? Are cryptocurrencies the classic example of a boom?
From boom to bubble
A period of economic boom can lead to a bubble that bursts with severe consequences. You could witness this during the famous technology boom in the late 90s. The internet was just emerging and people were running to the stock market to buy shares in various technology funds.
In the end, many companies were unable to live up to the high expectations, after which the stock exchange took a big hit. It is therefore important to be vigilant when stock prices rise to new, high levels. Always wonder if the surge is justified or if it is only driven by greed and false hope.
Growth itself is good
Economic growth or an economic boom is of course not wrong in itself. The economy always moves in so-called cycles in which very positive periods regularly alternate with less positive periods.
It is important to keep both feet on the ground during ascents. Ask yourself what driving force is behind the boom and whether it will continue. By doing so, you avoid suffering a big loss by following into the mass hysteria.