If you are already delving into investing yourself, you will probably have heard the term bubble. It is a phenomenon that investors must be very aware of. In the first place, this is because if a bubble bursts you run the risk of losing your money. If you play it smart, however, a bubble bursting can also earn you a lot of money. This may sound a bit weird if you do not know what a bubble is and how you can recognize it.
What is a bubble in investing?
Of course everyone knows what a bubble is. It is a thin layer of soap in which air is trapped. The soapy water layer is so thin that the bubble is light enough to float through the air. A consequence of this is that the bubble is very fragile and can burst at the slightest touch. A bubble in investing is of course totally different.
However, there are several similar features of the two types of bubbles and these allow you to earn a lot of money. In investing, the term bubble is used when a stock, or the stocks of a total category of companies, is estimated to be too high in value. This can occur, among other things, because investors have extremely speculated on the stocks. Another reason may be that the growth of an industry has been totally misjudged. The much too high price is a bubble that will burst and the price can drop dramatically in a short time.
Recognizing the bursting of a bubble
As an investor, it is not so important to learn to recognize a bubble. This is not that difficult. The financial newspapers and other publications will certainly report on this. This is what they did before the so-called internet bubble that burst in the year 2000. The result was a crash on the stock exchange and the collapse of almost all the stocks that were connected to Internet companies.
Some companies succumbed to this stock market crash and have never returned. Other companies, such as Amazon and eBay, have come back on top of the crash and are now worth more than before the bubble burst in 2000. Studying these earlier stock market crashes is a good way to recognize a new bubble and know when it will burst. Maybe you can recognize signals that a new crash is coming.
Bubbles and opportunities with investing in CFDS
If you have already gone through our course on investing in CFDs, then you know by now that with this form of investing you can earn money with both an increase and a decrease of the price. Because you benefit from the greatest possible difference in the price, it is not difficult to understand that you can earn a lot of money if you know how to recognize a bubble.
Anyone who can predict a dramatic fall in a stock or market price will be able to earn a huge amount from CFD investing in a short time. To do so they would use the option to go short. With this you bet that a certain price will fall. Are you very sure that the decrease will start? Then you can also use leverage to make the profit even higher.