Stock Market Bubble Basics

I heard a simple explanation of how bubbles in the stock market eventually pop that clicked for me.

So let’s say that I buy this and this is a unit of artificial intelligence. So let’s say I buy one share in one of the big AI companies right now.

Because investors are so excited about AI, they value this at $100. This unit that I have here, they say it’s worth $100. So my net worth is now $100.

I go to the bank because I have this net worth, this paper worth $100. And I asked the bank for a 50% loan on this thing that I own. They give me $50. Now I have $50. [margin loans or a securities-based lines of credit (SBLOC)]

And then something happens in the economy, which means that the investors who’ve invested in this, and investors generally now need money to pay off their other debts that they have. So this could be a war, it could be some kind of event that takes place, and suddenly everybody rushes to sell their assets like this one.

And so when I go to sell this, the price of it has now plummeted to say maybe $25, but I took a loan at the bank for $50. So I owe the bank $50, but now this thing that I have, that was worth $100 a couple of months ago is now worth $25 and I’m $25 in the hole, so I have to quickly sell. And then with everybody selling, all the price of assets drops. People stop spending money at the restaurants. Like you say, there’s less money around and then the bubble has burst and we’re in this sort of declining…