The South Sea Bubble occurred in Britain in 1720 when the South Sea Company, created to manage part of the national debt, convinced investors it would earn huge profits from trade in Spanish South America.
In exchange for taking on government debt, the company gained the right to issue new shares.
Stock prices surged, driven by promotion and expectations—not actual earnings or trade results.
Parliament members, aristocrats, and ordinary citizens invested heavily as demand grew.
When doubts emerged about the company’s real trading prospects, confidence collapsed.
The stock crashed, wiping out fortunes and causing widespread financial distress.

What Drove the Bubble

Government endorsement created a false sense of safety.
Investors purchased shares using generous credit terms—an early form of margin financing.
Promotional campaigns exaggerated potential profits from South American trade.
Rising prices attracted momentum-driven buyers, detached from fundamentals.
Political connections fueled beliefs that success was guaranteed.
Once early investors sold and credit tightened, sentiment reversed and the collapse accelerated.

Investor Lessons

Credibility and political proximity can mask real risk.
Leverage amplifies both enthusiasm and panic.
Influential promoters can distort analysis and drive prices beyond fundamentals.
Bubbles often end with doubt or loss of momentum—not a dramatic event.
When valuation depends on narrative, insider influence, or financial engineering rather than cash flows, risk becomes asymmetric.
Independent judgment and skepticism are essential, especially in politically connected schemes.

The South Sea Bubble (1720)