In this essay I will examine the investor behavior during the South Sea Bubble around 1720 and the involved South Sea Company. Nearly 300 years ago at the London Stock Exchange formed an enormous speculative bubble. In the eighteenth century the trade brought exotic products, such as commodities and slaves with exorbitant profits. This benefited appropriate commercial companies like the trading company South Sea Company. Its share price exploded from 120 to 950 pounds. Trigger of the former stock market crash: The South Sea Company did not have enough cash to pay overdue dividends.
Therefore, I will try to reflect the investor behaviour at that time to maintain more information about why they act like they act. Additionally, I want to give a small outlook on equity valuation the time of the South Sea Bubble. My intent is not to deliver a detailed calculation of shares, rather to investigate the valuation at that time and thus to represent the theory of the pricing relationship. Second it should demonstrate the purpose of the subscription finance and its implementation. In 1720 and the later eighteenth century subscription finance was one of the great legal and political debates. Therefore, for this article it’s important to give information about subscription shares and the historical background, before investigate the legal and political history of the South Sea Company and to give a context to the eighteen-century for subscription finance and the South Sea Company.
Deducted from this information, the paper will thus investigate what kind of investor behaviour was common and it will try to answer the question if this behaviour was rational or irrational. What different investor strategies can be found in this period and during the bubble, regarding the question which explanations can be found to explain the phenomenon when market prices deviate from fundamental values. Additionally, why investors act how they act settled in an overloaded stock market.
Therefore, the paper focuses on one of the most famous bubbles, that associated with the rise and fall of the South Sea Company during 1720. [...]
Table of Contents
- 1 Introduction
- 2 Historical Background to the South Sea Company
- 3 Subscription shares
- 4 Investments and Investor Behaviour in the Bubble Crash
- 5 Conclusion
Objectives and Key Themes
This essay examines investor behavior during the South Sea Bubble of 1720, focusing on the South Sea Company's role and the factors contributing to the speculative bubble. It aims to understand investor motivations and strategies during this period, analyzing whether their actions were rational or irrational. The essay also explores the context of subscription finance and its relevance to the bubble.
- Investor behavior during the South Sea Bubble
- The role of the South Sea Company in the bubble
- The significance of subscription finance in 18th-century England
- Equity valuation during the South Sea Bubble
- Rationality vs. irrationality of investor actions
Chapter Summaries
1 Introduction: This introductory chapter sets the stage for the essay by outlining its primary objective: to analyze investor behavior during the South Sea Bubble. It highlights the immense speculative bubble that formed at the London Stock Exchange in 1720, fueled by the South Sea Company's soaring share price. The chapter introduces the central questions the essay seeks to answer, focusing on investor motivations, strategies, and the rationality of their actions within the context of the era's equity valuation practices. The author also explicitly states an intention to explore the role of subscription finance and its historical context.
2 Historical Background to the South Sea Company: This chapter delves into the historical context of the South Sea Company, emphasizing its founding in 1711 and its initial purpose of trading with Spanish America. However, it highlights that the company's primary involvement lay in managing government debt rather than foreign trade. The chapter describes the company's role in acquiring government debt, its bidding process against the Bank of England, and the subsequent debt conversion in 1719. This section emphasizes the crucial role of the unfixed conversion price in contributing to the bubble's growth, as it allowed the company to acquire government debt more cheaply as its share price rose. The chapter also details the company's use of bribes and "incentives" similar to stock options to manipulate the share price and the subsequent legislative actions taken in response to the burgeoning market.
Keywords
South Sea Bubble, South Sea Company, investor behavior, subscription finance, equity valuation, speculative bubble, 18th-century finance, market irrationality, government debt, stock market crash.
Frequently Asked Questions: A Comprehensive Language Preview
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This document provides a comprehensive preview of a language essay, offering a structured overview of its contents. It includes the table of contents, objectives and key themes, chapter summaries, and keywords. The preview is designed for academic use, facilitating analysis of the essay's themes.
What topics are covered in the essay?
The essay centers on investor behavior during the South Sea Bubble of 1720. It examines the role of the South Sea Company, the factors contributing to the speculative bubble, investor motivations and strategies, and whether those actions were rational or irrational. The essay also explores subscription finance and its relevance to the bubble.
What are the key themes explored in the essay?
Key themes include investor behavior during the South Sea Bubble, the South Sea Company's role in the bubble, the significance of subscription finance in 18th-century England, equity valuation during the South Sea Bubble, and the rationality versus irrationality of investor actions.
What does the introduction chapter cover?
The introduction sets the stage by outlining the essay's primary objective: analyzing investor behavior during the South Sea Bubble. It highlights the speculative bubble, introduces central questions regarding investor motivations and strategies, and mentions the exploration of subscription finance and its historical context.
What information is provided in the chapter on the historical background of the South Sea Company?
This chapter delves into the historical context of the South Sea Company, including its founding, initial purpose (trading with Spanish America), its role in managing government debt, the debt conversion process in 1719, and the role of the unfixed conversion price in fueling the bubble. It also details the company's use of bribes and incentives to manipulate share prices and subsequent legislative responses.
What are the key chapters of the essay?
The essay is structured into five chapters: 1. Introduction; 2. Historical Background to the South Sea Company; 3. Subscription shares; 4. Investments and Investor Behaviour in the Bubble Crash; 5. Conclusion.
What keywords are associated with this essay?
Keywords include South Sea Bubble, South Sea Company, investor behavior, subscription finance, equity valuation, speculative bubble, 18th-century finance, market irrationality, government debt, and stock market crash.
For whom is this preview intended?
This preview is intended for academic use, allowing for a structured and professional analysis of the essay's themes.
What is the intended audience for the full essay?
While not explicitly stated, the intended audience is likely academics and researchers interested in 18th-century finance, economic history, and investor behavior.
- Quote paper
- Maike Lux (Author), 2016, Investors and their Behavior during the South Sea Bubble, Munich, GRIN Verlag, https://www.grin.com/document/375481
