South Sea Bubble

DEFINITION of 'South Sea Bubble'

One of the largest stock scams of all time. The U.K.-based South Sea Company's shares saw a huge appreciation based on rumor, speculation and false claims before plummeting and eventually becoming worthless. Thousands of people lost their life savings.

BREAKING DOWN 'South Sea Bubble'

The scam occurred in 1720, when South Sea's stock soared in the wake of speculation and greed surrounding the monopoly the South Sea Company was perceived to have in the shipping and trade industries, particularly in Mexico and parts of South America.

With nothing to prevent it from doing otherwise, South Sea Company's management continued to issue shares in response to seemingly insatiable demand. As a result, the stock's price soared, defying all fundamental sense. Eventually, the truth was exposed: the company was making virtually no profit, and the share price plummeted when investors fled. In the post-Enron investing world, some have dubbed this scam the "Enron of England".