A stock market bubble where stock prices are much higher than their real value is a difficult thing to see when you’re in one.
Definitions vary, but stock market and tech bubbles can happen when investors drive up stock prices well beyond their actual worth as determined by the performance of the companies. Investing bubbles look as if they will rise forever, but they eventually pop because the high prices aren’t formed by anything substantial.
If you buy a high-flying stock as its price rises and don’t sell before the bubble bursts, you could lose a lot of money. Your capacity for risk can be tested quickly.
There are some things to look out for in determining if a stock market bubble is happening. Here are some:
Ping-pong table sales drop
The Wall Street Journal reports that ping-pong table vendors are selling fewer ping-pong tables in the Bay Area, where tech startups are popular. One business had a 50 percent drop in sales in the first quarter of 2016.
As big tech companies have struggled with layoffs, low revenue and lousy quarterly reports, they’ve stopped buying tables for their workers to play table tennis on.
This may be more of a tech bubble than an overall stock market bubble, though it could lead to a bigger bubble.
Fewer VC deals in stock market bubble
In another sign of a tech bubble, if not a stock market bubble, fewer venture capital deals are being made in Silicon Valley.
VC investment was down 30 percent from a recent spending high in the second quarter of 2015, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association.
Revenue, but no profit
As Dan Lyons writes in his excellent book “Disrupted” about the start-up bubble, businesses can report high profits for years but still not make a profit. By showing revenue growth each quarter, they can show VC firms and potential stock investors that they’re a growing company.
But that growth doesn’t mean much if they don’t make a profit, Lyons writes. Hubspot, Twitter and other tech companies do this regularly as a way to show investors they’re getting bigger.
Global markets crashing
There almost always seems to be at least one area of the world where the financial markets are in turmoil, which could be a sign of a stock market bubble in the United States.
From the financial troubles of Greece last summer to the latest collapse of the Chinese stock market, the sound of global markets crashing could be a warning sign of a stock market bubble.
If you really want to learn how stock market bubbles happen, read about historic stock market crashes and see how prices peak and implode. Incredibly high stock prices are just some of the most basic tipoffs.