DEFINITION of 'South Sea Bubble'

The South Sea Bubble, one of the largest stock scams of all time, occurred when the shares of the U.K.-based South Sea Company appreciated enormously based on rumor, speculation and false claims before plummeting and eventually becoming worthless.

BREAKING DOWN 'South Sea Bubble'

The scam occurred in 1720 when South Sea's stock soared in the wake of speculation about the company's perceived monopoly to trade with Mexico and certain countries in 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 and to publicize the trading opportunity as often as possible. As a result, the stock's price soared, defying all fundamental sense, and enabling early shareholders to profit off the hype-fueled drive in market price.

Eventually, the truth was exposed: the company was making virtually no profit. There wasn't much trade between Britain and South America because the region was controlled by Spain, whom with Britain was fighting in the War of Spanish Succession. In the wake of the news, which was leaked after management sold its shares upon realizing the stock was overvalued, the bubble popped and the share price plummeted as investors fled, costing thousands of people their life savings and weighing heavily on the British economy. 

In the post-Enron investing world, some have dubbed the South Sea scam the "Enron of England" because of the way its creators preyed on regular people by feeding them misrepresentations.

South Sea Bubble vs. Mississippi Bubble

European investors in the early 18th century were eager to get their hands on corporate stock shares, which led to a frenzied buying environment detached from economic reality that expanded beyond the South Sea Company. Around this time, the Mississippi Company increased demand in its shares by playing up its French government-backed monopoly over trading with certain French colonies in North America, notably Louisiana.

In what would later be referred to as the Mississippi Bubble, the Mississippi Company exaggerated the potential market demand for trade in Louisiana by feeding off land development speculation in the still-being-colonized U.S. The hype caused the company's stock to soar on an uptick in demand, which prompted the French government to authorize the printing of additional paper bank notes, which were used to pay out profits to investors. 

In 1720, however, the French government admitted that the paper notes exceeded the value of its metal coinage and the stock price plummeted. 

  1. Mississippi Company

    The Mississippi Company refers to an example of a famous speculative ...
  2. Speculative Bubble

    A speculative bubble is a spike in asset values within a particular ...
  3. Securities Exchange Act Of 1934

    The Securities Exchange Act of 1934 was created to provide governance ...
  4. Echo Bubble

    Echo bubble is a post-bubble rally that becomes another, smaller ...
  5. South African Reserve Bank

    The South African Reserve Bank is the central bank of South Africa. ...
  6. Nigerian Scam

    A Nigerian scam is a scheme in which a sender requests help in ...
Related Articles
  1. Investing

    Economic Bubble: Toil And Trouble!

    You might like the idea of profiting from a bubble, but you’d probably like to avoid suffering from its aftermath. Here is how an economic bubble works.
  2. Insights

    5 Steps Of A Bubble

    Bubbles are deceptive and unpredictable, but by studying their history we can prepare to our best ability.
  3. Insights

    5 Ways To Spot The Next Stock Bubble - And Avoid It

    Playing a market bubble could pay off, but it carries a lot of risk. Avoiding it could be the way to stay profitable.
  4. Insights

    Economic Meltdowns: Let Them Burn Or Stamp Them Out?

    Whether the Fed should intervene in market bubbles is up for debate. Learn about both sides here.
  5. Insights

    Wall Street History: The NYSE Is Born, Bubbles Form

    This week in financial history saw the birth of the NYSE an attempt to destroy Microsoft, and much more.
  6. Investing

    Betting Cryptocurrency Will Go Down? Short NVIDIA

    Skeptics are warning the cryptocurrency craze will crash. One way to play it: short NVIDIA.
  7. Investing

    The Top 3 ETFs For Investing in South Korea (SSNLF, EWY)

    Learn more about the small yet growing number of South Korea ETFs, which track the often forgotten Asian Tiger responsible for Samsung, Kia and Hyundai.
  8. Investing

    South Africa ETF Vulnerable Amid Political Volatility

    The South Africa ETF could see more downside amid a shakeup in the country's finance ministry.
  9. Insights

    What Causes Bubbles?

    A look at how asset bubbles are formed according to different schools of thought.
  10. Tech

    What If a Cryptocurrency Bubble Isn't That Bad?

    There is a gold-rush mentality swirling around ICOs and cryptocurrencies. If it's a bubble, is there an upside?
  1. What burst the Mississippi bubble?

    The Mississippi bubble is actually more of a currency blunder than a true speculative bubble. Read Answer >>
  2. Can the Efficient Market Hypothesis explain economic bubbles?

    Learn about the nuanced relationship between the efficient market hypothesis and economic bubbles and the requirements and ... Read Answer >>
  3. What lessons did the tech bubble crash give to investors in the Internet sector?

    Learn how investors contributed to the dot-com bust and how Internet services and investing has changed since the market ... Read Answer >>
  4. How does a pump and dump scam work?

    A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once ... Read Answer >>
  5. What are the top Social Security scams targeted at the elderly?

    Prevent Social Security scams by learning to recognize the most common types of scams that target senior citizens receiving ... Read Answer >>
  6. What are the most common scams regarding Social Security benefits?

    Learn about some of the most common Social Security scams that occur by phone, email and direct mail, and how to recognize ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center