A:

The British East India Company introduced England to the joys of corporate finance. The company enjoyed a government-backed monopoly on trade and paid hefty dividends to the shareholders. Unfortunately, the shares were largely held for the long-term by government officials and the upper class, so the public could only watch with envy as the rich got richer. With the appetite for shares growing, many companies looked for an opportunity to tap into the new capital.

The South Seas Company was the first to find a way in. It secured a similar charter from the king for a monopoly in the South Seas. The SSC's first issue of shares were snapped up so quickly and appreciated through trading so rapidly, that the company felt no qualms about making numerous re-issues. Before the first ship ever left port, the company had used its profits to open luxurious offices in the best parts of London.

It didn't take long for other businesses to catch on to the magic hold that stock had on the public. New ventures offering new shares materialized overnight and were snapped up even as the ink was drying. Conmen outdid each other in thinking up ludicrous enterprises such as reclaiming sunshine from vegetables or constructing vast floating suburbs. The prize for most creative, however, goes to a company selling shares in an undertaking of vast importance that was so secret that nothing more could be revealed. It sold and traded as vigorously as all the rest.

The bubble that started with the SSC, also ended with it. When the company failed to pay the incredible dividends investors had imagined, it started a chain reaction of sober realization and plummeting share prices. The complete lack of profits on mountains of worthless paper destroyed fortunes as well as England's faith in the stock market.

Read about other historic crashes from the Tulip Crisis to the Asian Crisis in our Market Crashes Tutorial.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. What was the first company to issue stock?

    The Dutch East India Company undertook the world's first IPO and, therefore, became the first public company to issue stock. ... Read Answer >>
  2. Are monopolies always bad?

    Learn why governments sanction some monopolies, such as monopolies over public utilities, and why these monopolies are good ... Read Answer >>
  3. Are there any legal monopolies in America or Europe?

    Legal monopolies continue to exist in the United States and Europe despite the current trend against their recognition and ... Read Answer >>
  4. What are Common Examples of Monopolistic Markets?

    Monopoly, as a theoretical economic construct, prevails when barriers to entry exist because one firm can operate at a lower ... Read Answer >>
  5. What burst the Mississippi bubble?

    In 1715, France was essentially insolvent as a nation. Even though taxes were raised to extremely high levels, the hole that ... Read Answer >>
  6. How does a monopoly contribute to market failure?

    Read a simple overview of the theory of market monopoly, where it originated and some contemporary challenges to the classical ... Read Answer >>
Related Articles
  1. Insights

    The Birth of Stock Exchanges

    Learn how British coffeehouses helped give rise to the juggernaut that is the NYSE.
  2. Investing

    Early Monopolies: Conquest And Corruption

    This structure can be very effective, but it is also known for its abuse of power.
  3. Insights

    How & Why Companies Become Monopolies

    Without competition, monopolies can raise prices and lower quality leaving consumers little choice. But monopolies can benefit consumers as well.
  4. Insights

    Five Of The Largest Asset Bubbles In History

    The five bubbles discussed here were among the biggest in history; their lessons should be heeded.
  5. Insights

    Why the South China Sea Dispute Matters for the United States

    The South China Sea dispute between China and other countries that border the area matters to the United States...
  6. Insights

    A History Of U.S. Monopolies

    These monoliths helped develop the economy and infrastructure at the expense of competition.
  7. Investing

    Examining Credit Crunches Around The World

    Market tops and bottoms have proliferated the financial markets throughout history. Learn how countries dealt with these tough economic periods.
  8. Insights

    The History of Stock Exchanges

    Stock exchanges began with countries who sailed east in the 1600s, braving pirates and bad weather to find goods they could trade back home.
  9. Insights

    A History Of U.S. Monopolies

    Here are a few of the most notorious monopolies in U.S. history.
RELATED TERMS
  1. South Sea Bubble

    One of the largest stock scams of all time. The U.K.-based South ...
  2. Stock Market

    Exchanges or over-the-counter markets in which shares of publicly ...
  3. Natural Monopoly

    A type of monopoly that exists as a result of the high fixed ...
  4. Legal Monopoly

    A company that is operating as a monopoly under a government ...
  5. Franchised Monopoly

    Monopoly status given by the government to a company. A franchised ...
  6. Monopoly

    A situation where a single company or group owns all or nearly ...
Hot Definitions
  1. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  2. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  3. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  4. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  5. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  6. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
Trading Center