Stock market bubbles are periods of rapid and unsustainable price increases in the stock market, leading to the overvaluation of stocks and other financial assets. They are characterized by a surge in investor enthusiasm and speculative buying, causing prices to detach from the underlying fundamentals of the companies or assets.

Bubbles typically form when there is an influx of new investors drawn into the market due to the perception of easy and quick profits. As more people buy into the rising market, demand increases, pushing prices even higher. This creates a positive feedback loop where the expectation of further gains fuels more buying, irrespective of the asset's intrinsic value.

Several factors contribute to the formation of stock market bubbles:

1. Herd Mentality: Investors tend to follow the crowd, leading to a bandwagon effect, where they buy simply because others are buying.

2. Speculation: Speculators enter the market, hoping to profit from rising prices without necessarily considering the asset's true worth.

3. Loose Monetary Policy: When central banks implement loose monetary policies, such as low-interest rates and quantitative easing, it injects liquidity into the market, encouraging risk-taking and asset inflation.

4. Over-optimism and Euphoria: Excessive optimism about future market prospects can lead to inflated valuations.

Ultimately, bubbles burst when the excessive optimism and speculation can no longer sustain the rising prices. As a result, demand falls, leading to a sharp and sudden decline in prices, often wiping out significant portions of investors' wealth.

Recognizing and understanding the signs of a bubble is crucial for investors to avoid the pitfalls of investing at unsustainable valuations. Rational analysis, diversification, and a long-term investment approach can help investors navigate through bubble-like situations and mitigate potential losses.