Stock Market Prices and the Media During the Tech Bubble
Stock Price and the Media During the Tech Stock Bubble
The world of stock trading at first gives the impression of a hardcore science. Prediction of stock movement is based on a complex series of formulas, algorithms, and mathematical predictive models. These portions of stock trading represent the quantitative element of the stock world. However, there is also a qualitative side to stock trading that is often not addressed via traditional stock trading metrics. The world of finance is reactive to major world events and other conditions such as consumer demand. Prior to the great tech stock crash of the 1990s, tech companies attempted to make a profit based on trends in consumer demand. This research will analyze two companies that used unethical practices to profit from the tech stock crash.
The Rise and Fall of the Tech Sector
The rise of the Internet meant the founding and sometimes quick downfall of Internet-based companies. Many companies increased their stock price by simply adding the prefix "e" to their name (Galbraith & Hale, 2004). Rapid rises in stock prices caused a type of "flocking" affect among traders. When a stock price rose, even if the rise was unfounded in solid metrics, it enticed others to buy the stock in hopes of fast money. This created a "bubble" in tech sector stock prices. However, like a bubble, these rises in stock price more fragile because they had no basis in solid financial management of the company. The stocks were overvalued and many of them declined as quickly as they rose.
Dot-com business theory was based on the ideal that profits were best obtained by expanding one's customer base as quickly as possible, even when this would produce large debt or annual losses. Some of today's giants, such as Google and Amazon survived using this strategy to become some of the largest Internet companies after the bubble burst. However, many companies did not survive using this strategy. At the beginning of the bubble, anydot-com that looked promising could make an initial public offering (IPO) to raise capital, even if it had never had shown profit in the past. The company's lifespan was...
The following is a chart of what the February 2006 crash looked like, according to Bloomberg.com. Source: Bloomberg.com, 2007 According to Bloomberg, this downward crash had a dramatic effect on the U.S. market as well. When one views this chart, it is no wonder that speculators are divided about the reactions of Saudi Investors. This was a devastating crash for many and it will undoubtedly have a dramatic effect on their decisions
A number of economists suggest that markets are efficient, but this efficiency is merely assumed. In this regard, Batten points out that, "There is no actual proof. It is virtually impossible to test for market efficiency since the 'correct' prices cannot be observed. To get over this hurdle, most tests examine the ability of information-based trading strategies to make above-normal returns. But the results of such tests do not
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