The great Mississippi Bubble - Part 2
- December 12, 2016
- By Shantanu Paranjape
- 0 Comments
Continued from first Part!!
In the earlier part, we stopped at the general introduction of what is this Mississippi series. In this part we will again see some basic information and few terminologies which were famous at time.
[1] Rational Bubble – In these types of bubbles, speculators
usually buy shares when the prices of shares and sell when the prices are
falling i.e. first to make share prices rising and then sell at one point when
price reaches at the highest level to earn huge profits.
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| Mississippi Bubble |
In the earlier part, we stopped at the general introduction of what is this Mississippi series. In this part we will again see some basic information and few terminologies which were famous at time.
Start
of the first speculative boom
Financial bubble of Mississippi, the South Sea bubble in
England and some other related bubbles in Holland were the start of the
speculative boom in the international stock market. This was all started in the
early decade of the 18th Century, i.e. In 1719-1720 period. In fact,
the bubble of Mississippi was responsible for two things. The word ‘bubble’ was
started to use as a synonym to ‘Speculative boom’ and a hesitation to use word
‘bank’ for next 150 years due to John Law and his 'Banque General'.
If we check the dictionary meaning of the financial
bubble, then it shows that bubble means, “any unsound commercial undertaking
accompanied by a high degree of speculation", and the same thing happened
in these bubbles.
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| A comparison of share prices of Mississippi Company. We will read the detailed explanation in the next parts. |
Insiders and outsiders
Let’s assume that the whole bubble thing
was a game which was played by two important persons, Insiders and outsiders.
Insiders were having superior position than outsiders due to knowledge of the
actual prospectus of the company, they were having information about the
changes in the authorized capital of the company as well as the number of
shares issued to general public i.e. outsiders in this case. Well, no doubt
later they disclosed this information to outsiders but still their hands were
tied due to the commitments given to their supporters as well as political
leaders of the time.
On the opposite side, there were
outsiders who again got divided into two types. 1. “Speculators” and 2.
“suckers”. If we see from the economic point of, not in this case but in any
case, “Speculators” are responsible for the sudden ups and downs of the share
price of the company. They usually react very fast and expect more profit.
Hence they buy shares in lot during the bubble period and sell their just
before the collapse of the share price which in turns reduce the market price
of the share. The exact same case happened during the Mississippi Bubble.
Mississippi bubble was an example of ‘rational bubble’ [1]
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