Dot Com Crash

Dot Com Crash

Introduction

A boom in NASDAQ index in early 2000 triggered the most devastating financial crisis in internet industry. On March 10,2000, the NASDAQ is peaked at the historical high of 5132.52 and on next Monday March 13th large sum of sell orders of IT stock were processed simultaneously. In the next following months until October 2000, the index eventually went down to 1114 with a total lost of 78% of its highest value. The whole market suffered five trillion losses causing by the world's biggest dot-com bubble.

The start of the boom

Rise in the number of internet users in late 90's stimulate the demand of hundreds of internet based companies known as dot-com. In 1999 there were 457 IPOs in the U.S. Stock market, most of which is internet related. And more dramatically, more than one hundred of those stock doubled their price on the first day of trading.

Comparing the following data:

Variable Mean Median

Market value of Equity(million USD) Internet 4495 1323

Non-internet 5111 599

Stock Price

(USD) Internet 65.96 45.38

Non-internet 33.97 22.00

Median daily volume Internet 78558 16419

Non-internet 24988 2321

The internet related stock exceed the other stock substantially in all aspects during the bubble. The average price of internet stock is almost twice the other's and the trading volume is more than three times. The internet stock is absolutely becoming the market leader.

Cause of the collapse

However, excessive rapid growth is never the way to build a solid industry. One of the major reason of the failure behind the bubble is that majority of the investment were coming from the retailers not the institutions. The rise of unrealistic price in internet stock in mostly driving by inexperienced retail investors who make investment decision by following the market trends.

The prosperous picture only last until early 2000. The new seller including employees of the underwriting company starts to enter into the market once the lock-up period expires. And this starts to break the demand and supply equilibrium of the internet stock causing the stock price falling.

One of another macro economic condition that is worth mentioning in regards to the dot com bubble is the year 2000 switchover. A significant amount of spending is injected in to IT industry due to the great concern of collapse that may cause by confusion of 1900 and 2000 in the computer system. Those spending is cutting