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The South Sea Bubble was formed by a more multifaceted set of situations than the Dutch Tulip mania , but has nonetheless gone down in history as an additional classic instance of a financial bubble. The South Sea Company was formed in 1711, and was promised a monopoly by the British government on all trade with the Spanish colonies of South America. Expectant a repeat of the achievement of the East India Company, which had a flourishing business with India, investors snapped up shares of the South Sea Company. As its directors circulated tall tales of unconceivable riches in the South Seas (present-day South America), stocks of the company gushed more than eight-fold in 1720, from £128 in January to £1050 in June, before crumpling in the succeeding months and instigating a severe financial crisis. The South Sea Company 's foundation in 1711 followed the normal joint-stock company model. A joint-stock company held a royal charter which allowable it certain privilege...

Before we get into the story of The Tulip Mania, we ought to understand economic bubbles , what they do and how they come about? A bubble is an economic cycle categorized by the rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unjustified by the fundamentals of the asset and driven by excited market behaviour. When no more investors are eager to buy at the preeminent price, a huge sell-off occurs, triggering the bubble to deflate. How a Bubble Works? Bubbles form in economies, securities, stock markets and business sectors because of a change in investor behaviour. This can be a real change — as seen in the bubble economy of Japan in the 1980s when banks were partially deregulated, or a paradigm shift — which took place during the dot-com boom in the late 1990s and early 2000s. During the boom, people bought tech stocks at high prices, believing they could sell them at a higher price ...