Economic Bubble at Tea Stall near Pancharatna – Part 1

(Disclaimer: below post is only meant for light informational reading. Numbers and terms are over-simplified for same reason)

Everyone has heard about bubble.
In physics – bubble means a very thin film of soapy water that forms a sphere – usually last for only a few moments before bursting, either on their own or on contact with another object.

Economic Bubble

Economic-Bubble-Indian-Diamond-Market

In Economics – bubble is a “trade in high volumes at prices that are considerably at variance with real values”. It could also be described as a trade in products or assets with inflated values.

Let’s once again do this in diamondbhai.com style – dramatize the whole explanation in to real world story.

In our story heroes name is Bhavani Shankar (BS). BS is a  hardworking employee in one of leading Diamond Manufacturing company, extremely smart and ambitious. One day frustated with a low paying job – decides to take a tea break. While sipping tea at Tea stall near Pancharatna building he decides – “enough is enough and now I want to do something big”. He decides to partner with Tea stall owner, brand it and launch IPO with name “Shree Bhavani Tea Multinational“.

<simplified numbers>
Tea stall earns – 1 lakh rupees every month   –>    earns 12 lakhs per year.
It means this business is worth 12 lakh rupees in 2010 – 2011.

He decides to create 1 lakh shares in market –> each share for face value 12 rupees.

BS keeps 50 thousand share for himself –> rest are floating in market
<simplified numbers>

Now BS starts working on Bubble creation:

BS gives advertisement in Mumbai Samachar – “Magical health benefit of Tea masala – anyone who drinks Tea from Shree Bhavani Tea stall near Pancharatna building – will never get health problems like Cancer, Blood pressure etc”. Everyone in Diamond market sees the news and ignores it. No one really believes that such a Tea masala exists and is being used by Tea stall near Pancharatna building. Thinks its a joke.

3 days later – a front page article gets published in Gujarat Samachar – a company from Japan is planning to buy Tea masala from “Shree Bhavani Tea Multinational” and open 50 Tea stalls all over Japan. Boom! Everyone is shocked to know this! Is this really happening?! A Japanese company believes it – so it must be true! If some Indian company said this, I would never believe, but this is Japanese company – I should have bought shares of  “Shree Bhavani Tea Multinational” on day 1, but its not too late. I will buy shares tomorrow morning as soon as market opens.

Next day shares of this company opens at 30 rupees and by the end of the day it closes 100 rupees. 12 rupees face value share has reached 100 rupees in few days.

Story will be continued in next blog post…

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