What is Dotcom Bubble?

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The dotcom bubble was a rapid rise in U.S. technology stock equity valuations fueled by investments in Internet-based companies during the bull market in the late 1990s. The value of equity markets grew exponentially during this period, with the technology-dominated Nasdaq index rising from under 1,000 to more than 5,000 between the years 1995 and 2000. Things started to change in 2000, and the bubble burst between 2001 and 2002 with equities entering a bear market.The crash that followed saw the Nasdaq index, which rose five-fold between 1995 and 2000, tumble from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct. 4, 2002, a 76.81% fall. By the end of 2001, most dotcom stocks went bust. Even the share prices of blue-chip technology stocks like Cisco, Intel, and Oracle lost more than 80% of their value. It would take 15 years for the Nasdaq to regain its peak, which it did on April 24, 2015.

Definition

The dot-com bubble refers to the rapid rise in U.S. technology stock equity valuations fueled by investments in internet companies during the late 1990s. This period was marked by an irrational exuberance in stock markets, particularly in tech stocks.

Origin

The dot-com bubble originated in the mid-1990s, driven by the rapid development and adoption of internet technologies, which captured significant investor interest. Between 1995 and 2000, the Nasdaq index soared from under 1,000 points to over 5,000 points. However, as doubts about the profitability of internet companies grew, the bubble burst in 2000, leading to a significant market downturn.

Categories and Features

The dot-com bubble primarily involved tech stocks, especially emerging internet companies. These companies often lacked profitability but saw their stock prices soar due to optimistic market expectations about the internet's future. Features of the bubble included high valuations, overheated markets, and irrational investor behavior.

Case Studies

A typical case is Pets.com, whose stock price surged after its 1999 IPO but eventually collapsed in 2000 due to a lack of a viable business model. Another example is Webvan, an online grocery delivery service that went bankrupt in 2001 despite significant investment.

Common Issues

Common issues faced by investors during the dot-com bubble included excessive optimism about company profitability and underestimation of market risks. Many mistakenly believed that the high growth of tech stocks could continue indefinitely, overlooking the importance of fundamental analysis.

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