Bubble

Subject – Economy

Concept –

Bubbles occur when assets become artificially expensive, driven by a false belief known as a misconception.
There are identifiers that might help spot potential, irrational exuberance in the market. Here are seven of them:
- Entry of new investors– About 1.42 crore new demat accounts were added in FY21, which is about threefold more than that seen in FY20.
- Leverage play – Leverage refers to the act of borrowing money to speculate in the market; this is generally funded by the broker or by an NBFC.
- High risk appetite – Investors are willing to allocate more capital than they would otherwise, towards asset classes which have done exceedingly well in recent times.
- Big-ticket IPOs – One more sign of a potential bubble is large IPOs starting to hit the market and getting oversubscribed.
- Predictive power – Another sign of market exuberance isto check the degree of confidence among market participants on future prediction.
- Small-cap trades – In the last few months, the rise in traded volume of small cap stocks is much higher than for stocks with large capitalisation, more liquidity and a wider investor base.
- Sudden rise in valuations- In every market cycle, a few sectors or a few types of stocks get all the attention.