As an investor you may come in contact with the term 'boom'. This is an economic concept that does not necessarily belong to investing, but is regularly used in the investment world. Do you not know what a boom is? Read more about this phenomenon in this article.
What is a boom?
A boom is a huge demand for certain products or services. This can also be a huge demand for a particular investment product, such as a specific stock. A boom is part of the overall economy of an economy. This shows both highs and lows.
A boom can occur at one of the many high points in the economic cycle. The economy is doing well, which creates a lot of demand for a specific product, a specific service or a specific investment product.
The result of a boom
If there is a lot of demand for a specific product, a particular service or a specific investment product, the demand automatically increases. 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.
Due to a boom, a proverbial bubble may eventually 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. You can read more about an investment bubble in this article.
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 unnecessarily 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 go with the crowd, especially when that crowd is behaving like a chicken without a head!
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 bulb boom. 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. This had to do first with the value of the bulbs, but later also with the social value that slowly arose. This social value 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?