A senior reporter at the South China Morning Post takes a look at one of the business world's hottest topics: the strength of the local stock market Hong Kong's stock market is hovering near all-time highs as investors from around the world continue to pump money into China's economy. But not everyone has been in a party mood, and some experts have been talking about a 'market bubble'. What exactly do they mean? Just like the bubbles you blow with your chewing gum, a market bubble will eventually pop. And when it happens it can cause a lot more trouble than a little bit of gum in your hair. Market bubbles begin when the stock market rises quickly and investors rush to buy shares because they want a piece of the action. They see others making money, and they don't want to be left out of the party. It's no different from buying a designer T-shirt. If enough people think they're cool, and really want one, the manufacturer can price them at far more than a T-shirt would normally cost. If everyone else thinks they're cool and is willing to pay top dollar for them, you're likely to be tempted as well, right? It's the same in the stock market, except that it's easier to sell shares than a used T-shirt. As the stock market rises, people keep buying shares in the hope that someone else will pay more for the shares than they did. You buy shares at HK$10 each, even though you know they're only really worth HK$8, because you're hoping that tomorrow someone else will think they're worth HK$12, and so on. Or, you are so blinded by your desire to make a profit that you believe companies are worth far more than they actually are. All the investors care about is that they'll be able to sell the shares for more money than they paid for them, and make a profit doing so. This is called speculation. When speculation gets out of control, the prices at which shares are bought and sold is far above the actual value of what the company owns or the income it generates. That is when you have a market bubble. Eventually people get worried that they won't be able to sell their shares for HK$12, or even HK$10. Or they might even have to sell them for HK$7 and lose money on their investment. Or they realise the hype about a company's future growth was just that, hype, and that the company will continue to lose money for years to come. So they hurry to sell, hoping to get out of the market before it falls too far and they lose all their money. And that's when the bubble has burst and the party is over. Shares: A unit of ownership in a company. Shares of a public company can be bought and sold on a stock market. Their market value is multiplied by the number of shares in the company to calculate market capitalisation. Speculation: Buying something in the hope of profiting from a future price change. As opposed to buying it for use or for income, such as buying a flat for the rent it can generate.
