Definition of Dot-Com Bubble

What does the term "dot-com bubble" mean? What is the definition of the term "dot-com bubble"?

On January 3rd, 1995, the NASDAQ closed at 743.58.

On January 3rd, 2000, the NASDAQ closed at 4,069.31. The NASDAQ would eventually go on to breach the 5,000 point level later in the year.

On January 3rd, 2002, the NASDAQ closed at 2,044.27.

Definition of Dot-Com Bubble - Financial Dictionary - Stock MarketsThis rollercoaster ride for the NASDAQ was mainly caused by the "dot-com bubble".

In the '90s, Internet companies such as, Ebay and others rose to prominence. Conducting business online promised to change the entire world, and these companies were set to cash in.

Investors smelled opportunity and started investing heavily in these companies. Shares of companies like Ebay and Amazon soared, and more investors looked to cash in.

As in any bubble, people got carried away. Money started chasing any company that was even remotely attached to the Internet. Companies who had never earned a dime of money were suddenly worth billions of dollars. As crazy as it sounds, companies were actually punished (from a valuation standpoint) if they made money. The companies that were losing money, it was reasoned, were more valuable because they were spending heavily on marketing and other costs in anticipation of heavy future growth. If you were making money, people argued, you weren't growing fast enough.

Many people lost their minds and started throwing every dollar into dot-com stocks. The stock market became a national obsession, and many households would remain glued to CNBC at night. All of a sudden, the "Money Honey" and Joe Kernen were national celebrities. The "Oracle of Omaha" Warren Buffett, arguably the most successful investor of all time, was actually on the defensive as many Berkshire Hathaway shareholders openly wondered why he wasn't investing in Internet companies.

As with any bubble, things ended very badly. The "dot-com bubble" started to pop in the spring of 2000 and was fully deflated roughly a year later. Shockingly, investors started caring about things like profits and positive cash flow again. Money-losing Internet firms were suddenly laughing stocks, and many went out of business virtually overnight.

Looking back on it, the "dot-com bubble" seems so ridiculous - how could investors get so caught up in the moment? The truth is that many investors, large and small, got caught up in the mania. If your neighbor was making six figures in a month trading Internet stocks, wouldn't you want to get involved in the madness as well? That's just how bubbles work - when you are in the middle of a bubble, you can't see the forest for the trees.

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