What is The Dot Com Bubble?
Let's break the wordings and look at them separately. Dot Com (.com) refers to the domain name of a website. Eg: (www.google.com; www.youtube.com; www.facebook.com) "com" however literally means 'commercial'. That means it's a commercial website. Although there are a large variety of such domain names (Eg: .edu; .info; .gov; .net) the websites/the internet is generally referred to as the 'dot com' world.
Then what is a 'Bubble'?
A bubble is a false or unexpected or unnatural surge of equity prices mainly due to high levels of speculation. It causes huge uprising in price levels of stocks without proper fundamental backing. So naturally the bubble will burst at some point and the whole market will collapse.
So The Dot Com Bubble was a similar situation that occurred during 1990s (1995-2000 to be specific) surrounding the highly speculated growth of the Internet.
Investors have invested massively in Internet based companies with high levels of speculations about their growth in the years to come.
During the mid-to-late 1990s, Cisco Systems, Dell, Intel, and Microsoft were known as "the Four Horsemen of the NASDAQ" because of their dominant market capitalizations. As the bursting of the Internet bubble approached, Cisco Systems, EMC, Sun Microsystems, and Oracle were known as "the Four Horsemen of the Internet."
During this period many companies were setup with the "e-" (i.e. Internet based) in their business names. Such companies witnessed sky rocketing stock prices. Low interest rates during the period has helped acquisition of more and more capital thus more and more investments.
According to dot-com theory, an Internet company's survival hung on expanding its customer base as quickly as possible, even if it incurred heavy annual losses. For instance, Google and Amazon did not see any profit in their first years. Amazon was spending on expanding customer base and alerting people to its existence and Google was busy spending on creating more powerful machine capacity to serve its expanding search engine. The phrase "Get large or get lost" was the wisdom of the day.
The Bubble Bursts...
During later 1999 and early 2000, the US Federal Reserves had taken steps to increase the interest rates by nearly 6 times. This affected the pace of the economy and started to loose pace. On 10th March 2000, the NASDAQ composite index peaked at peaked at 5,048.62 (intra-day peak 5,132.52), more than double the value it had just a year back. It shows how fast the bubble had grown. The NASDAQ dropped slightly after that, but this was attributed to correction by most market analysts; the actual reversal and subsequent bear market may have been triggered by the adverse findings of fact in the United States v. Microsoft case which was being heard in federal court. The findings, which declared Microsoft a monopoly, were widely expected in the weeks before their release on April 3. The following day, April 4, the NASDAQ fell from 4,283 points to 3,649 and rebounded back to 4,223, forming an intraday chart that looked like a stretched V.
By 20th March 2000, the NASDAQ had lost almost 10% from it's peak in 10th March 2000.
After the burst of the bubble many Dot Com companies went bankrupt due to financial burdens. Such companies are 'WorldCom', 'NorthPoint Communications', 'Global Crossing', 'JDS Uniphase', 'XO Communications', and 'Covad Communications'.
But a few finacially sound companies emerged as giants in the Dot Com industry after the bubble. They are 'Amazon.com', 'eBay' and 'Google'.
References: Wikipedia
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