open All Channels
seplocked Market Discussions
blankseplocked Defined Stock and Bond models for the EVE Market
 
This thread is older than 90 days and has been locked due to inactivity.


 
Author Topic

Hexxx
Minmatar
Posted - 2007.06.18 19:56:00 - [1]
 

Edited by: Hexxx on 18/06/2007 20:15:47
Edited by: Hexxx on 18/06/2007 19:59:00
Note: Thank you very much to Ionia. His advice has helped fashion this thread. I welcome any and all feedback/comments/suggestions on this thread.

This thread aims to standardize and discuss the model of two financial instruments and also provide some context for the current EVE market. The two financial instruments are:

1) Shares
2) Bonds

I will be trying to summarize most of the information and then follow that with a detailed discussion and outline of the specific attributes of Stocks and Bonds.

Why?

Through my discussions with Ionia and my own personal research, I have come to agree that while EVE is definitely different AND real-world models DO NOT always apply; there needs to be some restriction on "hybrid" models. These are dangerous to investors and can potentially cause confusion and/or inaccurate evaluations of potential investment opportunities.

What is a Share?

Shares are sometimes referred to as stocks in the US, but in the UK this is not the case, and so I'll simply use the term share for purposes of clarity. A person or organization which holds at least a partial share of stocks is called a shareholder. Companies listed on either of the EVE exchanges are expected to strive to enhance shareholder value. The purchase of one share entitles the owner of that share to literally share in the ownership of the company and potentially a fraction of the profits, which the company may issue as dividends. In the event the company liquidates, share holders are entitled to a portion of the value of the company.

What is a Bond?

A Bond is simply a loan. The issuer is equivalent to the borrower, the Bond holder to the lender. Bonds enable the issuer to finance long-term investments with external funds. A Bond has two prominent features, the first is a maturity date and the second is a fixed interest dividend. A maturity date is the date upon which the principal (the price at which each individual Bond was ORIGINALLY sold at by the borrower) is repaid. The fixed interest dividend is simply the interest payments that the borrower makes to the lenders.


So, in summary:

Shares (equity financing)
1) Partial ownership of the company (sometimes includes voting power)
2) Receives a fraction of the companies profits, and is based primarily on the performance of that company's business
(Subject to the profit sharing plan and dividend schedule laid out in the Initial Public Offering (IPO))
3) Can go on forever as long as the company continues to do business
4) Monthly or weekly reports expected
4) Entitled to a portion of the value of the company in case of liquidation.

Bonds (debt financing)
1) No ownership of the company
2) Receives a fixed interest payment in the form of dividends
3) Has an end date, known as a maturity date, at which point the issuer repays the nominal amount

Hexxx
Minmatar
Posted - 2007.06.18 19:56:00 - [2]
 

Edited by: Hexxx on 18/06/2007 20:00:12
Summary & Background:

The EVE markets have toiled in destitute for quite some time now. CCP mechanics only support the exchange of shares and the payment of dividends through those shares. They don't assist in making the exchange of shares secure, they simply let people give them to each other and the CEO of the Corp who issued the shares can pay dividends through them. That's it.

Despite these skeleton mechanics, many players have done the unlikely and helped fashion something that has come to resemble the "real life" markets. We now have brokers, exchanges, consultants/auditors, stocks, bonds, IPO's, and a few discussions on what makes a good report of your assets and liabilities. Public Corporations have opened up, serving not only their investors but the greater EVE community. The game is a richer place thanks to the many known (and equally unknown) efforts of the members of the market community.

My work:

Many of you are aware (or perhaps not) that I am a staunch advocate of standards. My IPO Template was published in direct result to my desire to see more standardized IPO's that cover crucial points that were often not being addressed and has been used for numberous IPO's. I have also served as a consultant to some public and some private entities. I have written numerous posts on investing best practices (linked in the market essential reading thread), trading, and I also run an EVE business workshop (formally known as Trading 101). Because of my desire to remain independent and objective in the markets, I do not own a single share or bond of any entity. It was my original intention to develop "new" models specific to EVE, but after a good deal of experience, discussion, and research, I am now convinced beyond a reasonable doubt that "real world" models are extremely appropriate to the EVE market place.

Hexxx
Minmatar
Posted - 2007.06.18 19:57:00 - [3]
 

Reserved.

Hexxx
Minmatar
Posted - 2007.06.18 20:02:00 - [4]
 

Reserved.

Proton Power
Amarr
Retirement Retreat
Posted - 2007.06.18 20:08:00 - [5]
 

I think you and Ionia have way to much time on your hands but props for trying to make Eve and Markets better.

Hexxx
Minmatar
Posted - 2007.06.18 20:11:00 - [6]
 

Originally by: Proton Power
I think you and Ionia have way to much time on your hands but props for trying to make Eve and Markets better.


Ionia provided feedback and suggestions; all accusations of madness/insanity can be directed my way as I am guilty of authoring the greater bulk of the post. Very Happy

hilaw
Posted - 2007.06.18 20:14:00 - [7]
 

Agreed, the system needs a little love, anyone else got the original manual which discusses share trading? Wink

Treelox
Posted - 2007.06.18 21:09:00 - [8]
 

Originally by: Hexxx
Originally by: Proton Power
I think you and Ionia have way to much time on your hands but props for trying to make Eve and Markets better.


Ionia provided feedback and suggestions; all accusations of madness/insanity can be directed my way as I am guilty of authoring the greater bulk of the post. Very Happy


no trust me hexxx, ionia is mad too

Pang Grohl
Posted - 2007.06.18 21:23:00 - [9]
 

It's my opinion that bond issues would be better off not using the share mechanics. While it would make for more work for the bond issuer, it would also minimize the complexity for corporations that use both instruments (shares & bonds), like Sovereign Enterprises.

Hexxx
Minmatar
Posted - 2007.06.18 21:42:00 - [10]
 

Originally by: Pang Grohl
It's my opinion that bond issues would be better off not using the share mechanics. While it would make for more work for the bond issuer, it would also minimize the complexity for corporations that use both instruments (shares & bonds), like Sovereign Enterprises.



The only mechanic that allows dividends (either profit sharing from true shares, or interest dividends from a bond) are shares.

Thus in-game shares must be used if dividends are to be paid.

The best solution is to make a seperate Corp for each finacial instrument. Some Corps do "hybrids"; Monoxon Industries is an example. The "hybrid" models are a cause for concern since they can be deceptively attractive for investors. This is NOT a commentary on any existing public "hybrid" models, just citing an example.

Pang Grohl
Posted - 2007.06.18 23:16:00 - [11]
 

Originally by: Hexxx
Originally by: Pang Grohl
It's my opinion that bond issues would be better off not using the share mechanics. While it would make for more work for the bond issuer, it would also minimize the complexity for corporations that use both instruments (shares & bonds), like Sovereign Enterprises.



The only mechanic that allows dividends (either profit sharing from true shares, or interest dividends from a bond) are shares.

Thus in-game shares must be used if dividends are to be paid.

The best solution is to make a seperate Corp for each finacial instrument. Some Corps do "hybrids"; Monoxon Industries is an example. The "hybrid" models are a cause for concern since they can be deceptively attractive for investors. This is NOT a commentary on any existing public "hybrid" models, just citing an example.


I agree that in game mechanics are missing for bonds, but that doesn't mean that shares are the only best for bond issues. Manual processing may not be attractive to everyone, but it works, and would provide a necessary segregation of the two types of instruments.

Hexxx
Minmatar
Posted - 2007.06.19 01:15:00 - [12]
 

Originally by: Pang Grohl
Originally by: Hexxx
Originally by: Pang Grohl
It's my opinion that bond issues would be better off not using the share mechanics. While it would make for more work for the bond issuer, it would also minimize the complexity for corporations that use both instruments (shares & bonds), like Sovereign Enterprises.



The only mechanic that allows dividends (either profit sharing from true shares, or interest dividends from a bond) are shares.

Thus in-game shares must be used if dividends are to be paid.

The best solution is to make a seperate Corp for each finacial instrument. Some Corps do "hybrids"; Monoxon Industries is an example. The "hybrid" models are a cause for concern since they can be deceptively attractive for investors. This is NOT a commentary on any existing public "hybrid" models, just citing an example.


I agree that in game mechanics are missing for bonds, but that doesn't mean that shares are the only best for bond issues. Manual processing may not be attractive to everyone, but it works, and would provide a necessary segregation of the two types of instruments.


The old adage of "Time is Money" springs to mind here when contemplating the administrative overhead that manual interest payments to Bond holders would create.

Shares in EVE are a meta-security (sort of a universal security if you will) which can then be cast as either:

1) an equity security (a true share)
2) a debt security (a bond)

Kahn Mer
Warped Mining
Posted - 2007.06.19 02:26:00 - [13]
 

Since you sound like you know your terminology, how would you classify what my corp calls 'Options'?

They work in a similar fashion to Bonds (isk loaned to corp) but can be cashed out by corp or buyer with minimal notice and instead of a fixed periodic interest rate, they pay a dividend based on corp profits. They do not denote corporate ownership since I run a dictatorship (no policy votes etc). Reports are issued monthly... no maturity date... and in the event of corp liquidation, holders would be re-imbursed original investment only. They are tradable.

There may not actually be a term for them since they're just something I put together to solve the issue in game, but I've had people (who I assume are RL market knowledgable) ask me what they compare to in RL. Any clue if they compare to a RL equivalent?

Thanks

Hexxx
Minmatar
Posted - 2007.06.19 04:07:00 - [14]
 

Edited by: Hexxx on 19/06/2007 04:09:31
Originally by: Kahn Mer
Since you sound like you know your terminology, how would you classify what my corp calls 'Options'?

They work in a similar fashion to Bonds (isk loaned to corp) but can be cashed out by corp or buyer with minimal notice and instead of a fixed periodic interest rate, they pay a dividend based on corp profits. They do not denote corporate ownership since I run a dictatorship (no policy votes etc). Reports are issued monthly... no maturity date... and in the event of corp liquidation, holders would be re-imbursed original investment only. They are tradable.

There may not actually be a term for them since they're just something I put together to solve the issue in game, but I've had people (who I assume are RL market knowledgable) ask me what they compare to in RL. Any clue if they compare to a RL equivalent?

Thanks


Honestly it just seems like a Class B (ie. non-voting) share. That's getting a little technical, but essentially it is just a share.

Bonds can have a call option, which basically allows the lender to "fast forward" the maturity date. It sounds like your just sponsering a buy-back program though, which is perfectly normal for shares issued by a Corp.

How do you consider it be to similiar to a Bond?

Ionia
Advanced Manufacturing
Posted - 2007.06.19 07:52:00 - [15]
 

I approve of this product and/or service.

Some clarification I would like to make though, is that bonds dont have to have a fixed return, but they technically shouldn't have a return based on corp performance. Bonds have variable returns based on fluctuations in the money market in real life (eg nominal interest rate + spread) but these kind of markets do not really exist in eve. Also a bond doesn't have to have a fixed maturity date, they can be perpetuities. Also the face value of the bond (at maturity) doesn't always have to be the same as the price paid. For instance a bond can mature in value over time.

All minor points :)

The differences that Hexxx pointed out are the most important for us to consider. That is reporting, ownership, performanced based profits etc.

Ionia
Advanced Manufacturing
Posted - 2007.06.19 08:12:00 - [16]
 

Originally by: Kahn Mer
Since you sound like you know your terminology, how would you classify what my corp calls 'Options'?

They work in a similar fashion to Bonds (isk loaned to corp) but can be cashed out by corp or buyer with minimal notice and instead of a fixed periodic interest rate, they pay a dividend based on corp profits. They do not denote corporate ownership since I run a dictatorship (no policy votes etc). Reports are issued monthly... no maturity date... and in the event of corp liquidation, holders would be re-imbursed original investment only. They are tradable.

There may not actually be a term for them since they're just something I put together to solve the issue in game, but I've had people (who I assume are RL market knowledgable) ask me what they compare to in RL. Any clue if they compare to a RL equivalent?

Thanks


One problem, in my opinion, is using terms that exist in the real securities market to describe something totally different in the EVE market. This is simply because these habbits catch on and it makes everything more confusing for everyone. The term 'option' is the one in question in this case.

The system you have described is a hybrid of shares and bonds. There is nothing wrong with that, but I would like to see the market eventually become more aware and demand 'a better deal' for shareholders. All of the hybrid systems I have come across have the features of shares and bonds that are beneficial to the corp and detrimental to the shareholder. Please be aware this isnt any kind of attack on you, your shares, or those of others. It is just a shareholder rights issue which i hope the market itself will demand in the future.

For instance here are the features of your securities...

Can be cashed out by the corp (good for corp)
Can be cashed out by the buyer (good for buyer)

No guaranteed payout (good for corp)
Performance based payout (good for either - depends on performance)

No ownership in corp (good for corp in 99% of cases)
No capital growth (good for corp)

Again, im not being critical of you personally.. just pointing out how hybrid systems almost always give the stock holder the worse end of the stick.

The ability for both parties to effectively terminate the investment is good, and bad, equally for both. It provides flexibility. In a typical, real life situation, a corp wishing to buy back shares would have to do it either by the voluntary sale from shareholders, or from a call option in the shareholder agreement which is usually one or more fixed dates in the future, allowing investors to plan their portfolio in respect to this.

You have the features of a bond - no capital growth prospects due to no ownership, and the features of a share - no minimal payout, performance based pay.

This is a common scenario in EVE and basically it amounts to the following...

A bond is a loan, you know how much youll get in advance, a safe, conservative investment.

A share is an ownership in the portion of a company. You gamble on the corp's sucess which provides you with returns in the form of dividends (a share of the profits) and capital growth (increase in value of your portion of the company).

You can see that these hybrid models take the burden off the corp to always provide a return, but do not provide a return in terms of capital growth like a share does. That is where the investor loses out, so to speak.

I will provide 2 examples, of how each model works to benefit the shareholder. The opposite of these is also true, but it demonstrates a balance between risk and reward.

PCT - shares. Company performance provided large dividends and fantastic capital growth. Shareholders reaped the benefit of both.

FRPB - bonds. Corp was robbed of 38b in assets. Shareholders lost nothing because they didn't have ownership.

These can, of course, be reversed, but it demonstates the risk/reward principal.

I'm running out of characters now so I better stop. :)

Ionia
Advanced Manufacturing
Posted - 2007.06.19 08:14:00 - [17]
 

Originally by: Hexxx
Note: Thank you very much to Ionia. His advice has helped fashion this thread.


Just thought of a new tagline: 'Ionia - consultant to the consultants' :D

Block Ukx
Forge Laboratories
Posted - 2007.06.19 11:06:00 - [18]
 

It might be worth repeating that the game only support shares; there are no bonds in EVE. Most bond issuers use shares to represent their bonds. Your wallet will only show shares not bonds.

Since you like standards, How about adding the word “Bond” at the end of the corporation name? This will help investors sort out between bonds and shares in their wallet.



Ionia
Advanced Manufacturing
Posted - 2007.06.19 11:15:00 - [19]
 

Originally by: Block Ukx
It might be worth repeating that the game only support shares; there are no bonds in EVE. Most bond issuers use shares to represent their bonds. Your wallet will only show shares not bonds.

Since you like standards, How about adding the word “Bond” at the end of the corporation name? This will help investors sort out between bonds and shares in their wallet.





Correct, they are basically arbitrary devices with voting power and dividend abilities. Putting bond at the end of the name wont do much good, because the wallet automatically adds 'shares' at the end of the corp name.

Block Ukx
Forge Laboratories
Posted - 2007.06.19 11:34:00 - [20]
 

Edited by: Block Ukx on 19/06/2007 11:41:00


Still, coming back 6-months later and reading the words “Bond shares” will remind you that it is a bond and not a share, and that it must be cashed out at maturity.

EDIT: It will also make it harder to trade as a share. You do not want people selling your bonds as shares for a 20% markup a few days before maturity.






Shar Tegral
Posted - 2007.06.19 12:35:00 - [21]
 

Originally by: Hexxx
The old adage of "Time is Money" springs to mind here when contemplating the administrative overhead that manual interest payments to Bond holders would create.

I agree with all that you state here except for this point here. I can say from a factual point of view, having done it, that manually issuing bond debt "payments" is not very taxing at all. However it all comes down to manageability, as you lightly touch upon. How I've handled it?

1: Consistent Administrative Processes.

Make sure you have some sort of spreadsheet to track each bond issue. (Not just each bondholder!) This allows you to track, pay debt on, and redeem each issued bond. Spreadsheet/database use is highly suggested.

2: Set Real Limits

I recently advised someone else who was looking to finance a freighter about this: Figure out how much you need and then divide that into large blocks (of isk) to limit the number of people you have to report.

Bonds should be used for specific capital raising goals for specific purposes whereas shares/stocks tend to transfer partial ownership in a company whose goal/direction may be more fluid. Or more simply, a bond is a debt instrument and a share/stock is an ownership instrument.

3: Communication/Tracking of Bondholders

I use both the buddy list and an in game mailing list to communicate with my bondholders. The in game mailing list is invaluable as communication/statements are an absolutely credible source and are not open to trolls/flames. The buddy list, by making a separate and distinct folder, allows for quick debt payment. Just go right down the list paying each person what they are owed. (Refer back to #1 - Spreadsheet is a must!)

To make the shares/bond market more robust these functions need to be addressed and implemented (imho):

A: A secure and fair method of share/bond transference.

B: Some method of call/buy back option. (For shares make it a vote.)

C: Some method of having multiple bond/share instruments.

D: Having the share votes occur according to how many shares exist not how many shares voted. (This is an ongoing bug imho)

I grant that I haven't made any specific suggestions regarding how these points should be resolved and I hate it when I or someone else does that. But I think we can all agree on the necessary points without raising any significant debate over solutions.

Ionia
Advanced Manufacturing
Posted - 2007.06.19 16:28:00 - [22]
 

Originally by: Shar Tegral
D: Having the share votes occur according to how many shares exist not how many shares voted. (This is an ongoing bug imho)


I've seen this said time and time again but I still have no idea why it is an issue. Surely showing the percentages of those that did vote is the best measure of the shareholders wishes overall. This is because it is the ONLY measure of them. What is the difference if you get 50% for 25% against and 25% with no vote compared to 67% for and 33% against. Does that change the outcome of anything?

Pang Grohl
Posted - 2007.06.19 16:35:00 - [23]
 

Originally by: Shar Tegral

To make the shares/bond market more robust these functions need to be addressed and implemented (imho):

A: A secure and fair method of share/bond transference.

B: Some method of call/buy back option. (For shares make it a vote.)

C: Some method of having multiple bond/share instruments.

D: Having the share votes occur according to how many shares exist not how many shares voted. (This is an ongoing bug imho)

I grant that I haven't made any specific suggestions regarding how these points should be resolved and I hate it when I or someone else does that. But I think we can all agree on the necessary points without raising any significant debate over solutions.[/justify]


Thank you, Shar, for an excellent illustration of the point I was trying to make.

In my mind, building a process and a data store to manage bond payments is no more taxing than creating a separate corporation to manage each bond issue (see Sovereign Enterprises, and Ionia's ventures). A manual process would also allow for a much more personal interaction with the bondholders.

As for the programmatic functions you've called out, I think that the secure transfer is by far the most critical, since we as players can't offer the security needed. With the others I think that the community needs to demonstrate more willingness to press forward with their use in spite of the lack of game features supporting them (multiple share issues, buy backs, bonds, etc).
In other words we need to solve the problem for ourselves, then ask for a game system to be implemented to eliminate the manual work.

Pang Grohl
Posted - 2007.06.19 16:42:00 - [24]
 

Originally by: Ionia
Originally by: Shar Tegral
D: Having the share votes occur according to how many shares exist not how many shares voted. (This is an ongoing bug imho)


I've seen this said time and time again but I still have no idea why it is an issue. Surely showing the percentages of those that did vote is the best measure of the shareholders wishes overall. This is because it is the ONLY measure of them. What is the difference if you get 50% for 25% against and 25% with no vote compared to 67% for and 33% against. Does that change the outcome of anything?


67% and 50% are drastically different.
It's very useful to know that 25% either didn't care, didn't care for the options presented, or lacked the information to make a distinction.

What about a situation where 30% are for, 20% against, and 50% don't vote? When you only know the result of those who voted you have an obvious majority. When you know the non-vote result you have a situation where the affirmative is clearly not the wish of the majority of shareholders.

Kahn Mer
Warped Mining
Posted - 2007.06.19 18:18:00 - [25]
 

Originally by: Hexxx
Edited by: Hexxx on 19/06/2007 04:09:31
Originally by: Kahn Mer
Since you sound like you know your terminology, how would you classify what my corp calls 'Options'?



Honestly it just seems like a Class B (ie. non-voting) share. That's getting a little technical, but essentially it is just a share.

Bonds can have a call option, which basically allows the lender to "fast forward" the maturity date. It sounds like your just sponsering a buy-back program though, which is perfectly normal for shares issued by a Corp.

How do you consider it be to similiar to a Bond?


Thanks for the info. I had found data on 'call options' and had used that comparison in the past when people asked. My liability has essentially been clasifying what we offer in terms which people can reference, so was curious about any RL equivalent.

I've called it similar to a bond only because holders are able to cash out for their original investment back. The value of the 'options' does not increase over time and the profit made from the investment comes solely from the dividends paid out.

Again tho, my understanding of the correct RL terminology may be causing me to use entirely incorrect terms.

Kahn Mer
Warped Mining
Posted - 2007.06.19 18:36:00 - [26]
 

Originally by: Ionia
Originally by: Kahn Mer
Since you sound like you know your terminology, how would you classify what my corp calls 'Options'?


...Please be aware this isnt any kind of attack on you, your shares, or those of others. It is just a shareholder rights issue which i hope the market itself will demand in the future...


Thanks Ionia. And no worries about me getting offended, I wanted feedback and criticism Very Happy

Your description of my system is basically correct. There are some details which I didnt bother posting here simply because they werent relevant to the terminology issue. They mitigate some of your points, but again not worth arguing.

The system in question was developed in response to what I saw as flaws with the current market systems as they currently existed. It seemed as if everyone was trying to apply RL security features to EVE corporations which to me seemed logically flawed, since CCP does not provide access to the same tools you would have in RL. Thus I took the approach of developing a new system, designed around the available tools and resources which I had access too.

It was completely different than what was offered as IPOs and public investments, so I avoided those entirely and went with private investment. The risks and lack of stockholder power/rights which you pointed out are real concerns which I had mostly detailed already in my FAQ pages (adjusted with a couple of your points actually).

I appreciate as well your point about using the term 'option'. As I mentioned, I have no RL market experience to go with. When the system was implemented, there were no terms used, but 'options' was adopted by the investors over time so it's what we're using now.

Thanks for the input.

Shakuul
Caldari
RuffRyders
Axiom Empire
Posted - 2007.06.19 23:44:00 - [27]
 

I'm skeptical of any remotely real world models of EVE Stocks and Bonds because in eve they are COMPLETELY UNREGULATED. For all intents and purposes, nonvoting shares are basically bonds. I have yet to see "bonds" in eve that are issued with a maturity date (so they're sort of like perpetuities, except not because the CEO will probably get bored and take everything or EVE will end). The bid/ask spread on stocks and bonds is horrible, so it would be hard/impossible to make any money simply by speculating that stocks will go up, you're probably much better off speculating on zydrine or something.

But anyway, I'm all for improving the stock trade (e.g. by creating something like contracts for shares).

Zolcan
Amarr
Praetoria Shipyards
Posted - 2007.06.20 02:01:00 - [28]
 


Quote:
It's my opinion that bond issues would be better off not using the share mechanics. While it would make for more work for the bond issuer, it would also minimize the complexity for corporations that use both instruments (shares & bonds), like Sovereign Enterprises.


We've actually created additional corps the help the bond issue function and it's been very easy that way. Basically when we do a dividend at period end I send corp cash to my alt who runs the bond corp in two payments (interest then principal).

This has several benefits.

1. We have seperate corps to pay each instrument thus its easy to keep them seperate.

2. When a bond is paid off we close the corp with a big disclaimer about the bonds being worthless in the corp description.

As an example if you pull up the bio for SOVEREIGN MANAGER you'll see in his personal bio information on the current bond and a note about the old bond being closed. If you look at his employment history you'll see the current bond (corp) and the old bond corp (closed) and the big disclaimer in the closed corps info.

I think this makes it very easy to administer both types of instruments.

Zolcan Very Happy


 

This thread is older than 90 days and has been locked due to inactivity.


 


The new forums are live

Please adjust your bookmarks to https://forums.eveonline.com

These forums are archived and read-only