What was the dot.com bubble?
In the world of investing, certain phrases catch on like wild fire. Before you know it, you’re hearing catchphrases on the news, on analyst shows and even on the street from strangers. Maybe no other phrase exemplifies this better than the dot.com bubble. The dot.com bubble was a mini-crash of sorts in the stock market that only affected one segment of stock: the internet company.
The origin of the dot.com bubble can be traced back to 1994. The rise of the Internet from being a Department of Defense secret to a widely used tool in everyday life caused the formation of thousands of new businesses seemingly overnight. Many of these dot.com’s were not run by people who knew that much about business, but the ease of starting their own company over the Internet was so simple, most investors didn’t realize this.
As people poured onto the Internet, excitement grew as to the possibility of reaching such a large number of people so easily and so cheaply. It was, however, the misunderstood nature of the Internet that caused the eventual dot.com crash. Reaching all those people and getting them to buy your product turned out to be a little more difficult than most thought.
Three particular companies that would come to represent the dot.com age were WorldCom, who would end up not surviving the bubble, Netscape, which is still in business today but is considered an also-ran by many, and Yahoo, who isn’t the industry leader it use to be, but is still doing quite well.
The “bubble” referred to in the name comes from investors speculating about a companies future, and as the stock for that company begins to rise, the bubble builds. It’s called a bubble because the speculation and the rise in stock prices isn’t based on any real, ironclad evidence that the company is really worth all the hype.
The Dot.coms began to fail en masse midway through 2000. The Nasdaq market felt the full brunt of these failures since so much of their listed companies were dot.coms. Many companies, such as WorldCom and Pets.com ended up going out of business, costing investors millions. Others, such as Yahoo and Amazon survived, with Amazon being stronger than ever.
It’s unknown if there will be another dot.com bust in the future. With Google having bought YouTube for over a billion dollars, anything is possible. But one hopes that investors will be more careful this time and heed the lessons of dot.com bubble’s past.
