Table of Contents:
1. The shares of a corporation, profit and PE-ratio [ top ]
When a corporation is created, it always has 100.000.000 shares. The shares are owned by either the country that has set it up, or by an Enterprise, if it is a private corporation.
When a corporation is being taken over by another enterprise it means that all 100.000.000 shares of the corporation are bought by the new owner. State corporations, National corporations and private corporations always have only one owner who owns all the shares of the corporation.
The profit of the corporation, after payment of taxes, divided by the number of shares of the corporation is the profit per share. If the profit for a year was 200 M and there are 100 M shares, then the profit per share is 2. We look at the profit per share for the past year.
In state owned or Enterprise owned corporations, the share price of the corporation is computed by the market value, divided by the number of shares. The market value depends on the profit of the corporation, the assets it has, debt etc. For public corporations, whose shares are traded on the stock exchange, the share price is decided on the market. Their market value is that share price multiplied by the number of shares. {text] Based on the share price and the profit per share, we can determine the PE-ratio (Price Earning ratio). This is the share price divided by the earning per share.
If the share price is 20 and the profit per share 2, then the PE-ratio is 10. The share costs ten times the profit per year. It means that the share can bring 10% profit per year.
If the profit per share was 4, the PE-ratio would he 20 divided by 4 which is 5. This means that the share price is only 5 times the profit per share. This is equivalent to 20% profit per year. A low PE-ratio is better than a higher one.
Using your money for loans in Simcountry, would most times pay 4% interest per year. This is comparable to a PE-ratio of 25. (100/4 = 25).
An enterprise can lend its money for 4% interest or purchase shares of corporations with a PE-ratio under 25 and earn more. Shares however do carry a risk. They can go down if the corporation starts making losses instead of earning money and when a corporation is bankrupt, the shares are worthless. Loans are always paid back with no risk but they carry a lower profit margin.
Corporations with good profits and a low PE-ratio tend to increase in value. Purchasing these shares and selling when their value goes up can be attractive.
2. Public corporations [ top ]
Corporations with high market value can offer their shares on the market and when these shares are bought by others, "the public", they become public corporations. Their shares are traded on the share market and their price depends on demand and supply of these shares on the share market.
3. Initial Public Offering (IPO) [ top ]
When a corporation (Private or a state corporation), offers its shares on the market for the first time it performs an IPO (Initial Public offering). Usually, the corporation will issue new shares and offer them on the market. Sometimes, the owner of the corporation, which is an enterprise or a country, may offer some of the shares he owns.
If new shares are issued, the proceeds from the sale go to the corporation. If the owner offers some of his shares, the proceeds will go to the owner. Only state and private corporations can become public. National corporations cannot go public and are never forced to go public.
4. Automatic IPOs [ top ]
Like in the real world, huge corporations are always public corporations. In the game, it is possible for a player to perform an IPO when a corporation reaches a value of 150 B. When the value is much higher, an IPO will be automatic.
Automatic IPOs take place when the value of a corporation reaches 350 B. This value may change in the future if the average value of corporations will change substantially.
The number of share transactions is increasing gradually as pension and investment funds use more of their profits and pay more to their customers. The increased transactions rate will also make it possible for players to purchase back many of the shares and even to take a corporation out of the stock market.
5. Manual share trading [ top ]
When share trading is set to manual mode, no share transaction will take place automatically any more. It is however possible that pending transactions that have been placed before, in automatic mode, are executed after the change into manual mode. This should not cause any confusion. Transaction can be pending for several game months.
6. Managing Public Corporations [ top ]
Public corporations may have many shareholders. The corporation is managed by the major shareholder. This is always either a country or an enterprise. Investment funds may become large shareholders in corporations but they never manage them.
Managing the corporation means that the corporation will appear on the list of public corporations you have. With 51% of the shares, undoubtedly you will be the largest shareholder and manage the corporation. However, if 20 investment funds together hold 85% of the shares, you may be the major shareholder with only 5% of the shares and manage it.
If another user succeeds in purchasing more shares and becomes a larger shareholder, the corporation will disappear from your list and surface on the list of the new major shareholder.
7. How does the Share Market work? [ top ]
Shares are offered for sale on the market by countries, enterprises and investments funds in each country. Shares are also purchased by enterprises, countries and by Investment funds. Both offers to sell and to purchase shares are submitted to the market and trading takes place depending on the prices asked and the bids made by the sellers and buyers.
Depending on the demand and supply, there may be shortage or oversupply of shares and prices will fluctuate. If there is more demand than supply of the shares of some corporation, its price will go up. It can increase by a max of 5% per game month.
Similarly, oversupply of shares, will cause their price to drop. It can drop by up to 5% per game month.
Share prices may fluctuate many times during a game month and depend on actions by users who offer or request shares all the time.
Users can watch the share market in action. Every traded share is shown with its recent value, history values, the share price, the PE-ratio, the number of share offered and requested, the profit per share, the volume (number of shares traded in the current month) and the best bid and ask prices.
8. Trading in shares [ top ]
Trading takes place nearly all the time. Most times, the trading stops 5 minutes before the hour and starts again 5 minutes later. The process is running as long as there are requests for buying and selling. When none are found, processing may stop for a minute and will resume to recheck for new requests.
Whenever the trading system finds a buyer and a seller that can be matched, it will execute a transaction. During the transaction, the seller will deliver the shares and receive a payment. The payment will be equal to the number of shares involved multiplied by the price per share. The buyer will receive the shares and pay the money to the seller.
Trading may be immediate if the trading system can find a match. If it does not find both a seller and a buyer, no transaction will be executed and the shares, offered or requested, will not be moved. The requests will stay in queue and wait for a match.
Request for buying or for selling shares, will be queued for up to 4 game months. If they are not executed within this period, they will automatically be retracted and removed from the queue.
9. Selling shares [ top ]
Selling shares can be done at market price or by specifying a limit. Selling at market price means that the shares will be sold at the best price possible. The price is generally the market price but it may be lowered by ongoing sell transactions and end up a little lower. It may be higher if many buy orders where entered just before the transaction. There is no minimum price guarantee but the trading function never allows for prices to decline by more than 5% per game month.
If there are no buyers for the shares, they will remain unsold. Share offers are retracted automatically if the shares are not sold within 4 game months.
The seller can also specify an ask price. This means that the shares will not be sold under that specified price. They will be sold against the best price available but never under the ask limit. The offer may remain unsold for up to four game months and will be retracted automatically if the shares remain unsold.
10. Buying shares [ top ]
Buying shares can be done at market price or by specifying a limit. Buying at market price means that the shares will be bought at the best price possible. The price is generally the market price but it may be increased by ongoing buy transactions and end up a little higher. It may be lower if many sell orders where entered just before the transaction. There is no maximum price guarantee but the trading function never allows for prices to increase by more than 5% per game month.
If there are no sellers of these shares, the purchase request will remain outstanding. Share buy orders are retracted automatically if the shares are not purchased within 4 game months.
The buyer can also specify a bid price. This means that the shares will not be bought above that specified price. They will be bought against the best price available but never above the bid limit. The bid may remain outstanding for up to four game months and will be retracted automatically if no shares become available.
11. Share selling by countries [ top ]
All countries own several or many state corporations. State corporations that become very profitable and reach a market value higher than 150 B, can perform an IPO and become public. The country can sell some of the shares in an IPO or the corporation can issue new shares.
The choice of who sells the shares depends on the reason for the IPO. The corporation may want to pay back debt or the country may want to cash some of the value of state corporations. At the IPO, up to 15% of the shares of the corporation may be sold.
If a corporation reaches a very high market value, an IPO may be performed automatically but it does not need to happen immediately. Typically, the IPO will take place randomly within 5 to 15 months.
Once a corporation becomes public, it will offer more of its shares on the share market at a rate of 2% of the corporation shares per game month.
The president may decide to sell more shares and can offer up to 10% of the corporation shares. Once the shares are sold, or partially sold, more shares can be offered but the total offered and unsold shares cannot exceed 10% of the total number of shares in the corporation.
Automatic selling will continue at a rate of 2% per game month as long as the shares are sold and as long as the country has more than 51% of the shares of the corporation. When that level is reached or the shares are not sold, the procedure will stop offering additional shares.
12. Share buying by Countries [ top ]
Countries are very limited in the purchasing of shares. Countries can purchase shares only in corporations that reside in the country. Any buy order may not exceed 5% of the outstanding shares of the corporation and new buy orders will be accepted is the total of outstanding orders does not exceed 5%. Repurchasing of shares by countries is always triggered by the user. There is no automatic share purchasing by countries.
13. Shares owned by Countries [ top ]
In some cases, countries and even Computer Controlled Countries, can own shares in corporations that are not owned by the country. This can happen when a corporation is moved to another country while some of the shares are owned by the country of origin.
This situation is undesired and unintended and causes problems, mainly when C3 countries own shares in foreign corporations and will not sell these shares, defying market logic.
Presidents cannot purchase shares in such corporations. C3 countries will automatically sell such shares and this problem will disappear in time.
14. Share selling by Enterprises [ top ]
All enterprises own private corporations. Private corporations that become very profitable and reach a market value higher than 150 B, can perform an IPO and become public. The Enterprise can sell some of the shares in an IPO or the corporation can issue new shares.
The choice of who sells the shares depends on the reason for the IPO. The corporation may want to pay back debt or the enterprise may want to cash some of the value of state corporations. At the IPO, up to 15% of the shares of the corporation may be sold.
If a corporation reaches a market value of 250 B, an IPO will be performed automatically but it does not need to happen immediately. Typically, the IPO will take place randomly within 5 to 15 months.
Once a corporation becomes public, it will offer more of its shares on the share market at a rate of 2% of the corporation shares per game month.
The CEO may decide to sell more shares and can offer up to 10% of the corporation shares. Once the shares are sold, or partially sold, more shares can be offered but the total offered and unsold shares cannot exceed 10% of the total number of shares in the corporation.
Automatic selling will continue at a rate of 2% per game month as long as the shares are sold and as long as the enterprise has more than 51% of the shares of the corporation. When that level is reached or the shares are not sold, the procedure will stop offering additional shares.
Enterprises also sell shares that are not attractive. When the PE-ratio of shares reaches a level of 30 to 50 or even higher, expected profits diminish and it makes no sense to hold the shares. Corporations will offer these shares for sale.
In some cases however, when the corporation is producing a product that is in short supply and its price is increasing or the corporation is being upgraded and developed with higher salaries and production and potential profits, buying such shares may be profitable as the corporate profits may increase and its PE-ratio may become more attractive.
Corporations will in the future also sell shares they bought for a low price and can make a large profit on selling them. Profit taking is an accepted strategy in the market and the proceeds can be used to purchase shares in other, may be more promising corporations.
15. Share buying by Enterprises [ top ]
Enterprises can trade freely in any shares. Orders for shares are always limited in size. Currently the limit is 5% of the shares of any corporation. Enterprises are limited to 200 different shares and may not purchase any shares if their holdings in a corporation is above 51%. The limitations may be changed in time.
Share purchases by enterprises are always by the user and are not performed automatically.
16. Share buying by investment funds [ top ]
Investment funds receive money from wealthy citizens and invest the money for profit that is given back to the citizens of the country to supplement their income.
The money was loaned to the World Bank that used it for loans to countries and corporations. Part of the available funds, are now flowing into the share market. The investment funds invest 1% to 2% of their cash into 5 to 10 different shares each month. The Investment funds are limited to 200 different funds and never purchase more than 2% of the shares of a corporation in one order. They are also limited to a maximum of 30% of the shares of a corporation.
Investment funds will try to hold a larger percentage of the shares of a smaller group of corporations. Very small share holdings will be sold and more shares will be purchased of corporations that are already in the portfolio.
This strategy will make it easier to manage the portfolio and create more insight in the different funds being held.
Investment funds are passive investors and never intervene in the management of corporations. Even when the investment fund is the largest shareholder, it will not manage the corporation.
17. Shares selling by Investment funds [ top ]
Investment funds will sell some of their shares if they conclude that they have made a good profit and want to reduce their risk or just cash the profit. They will also sell shares that became unattractive as the profits of the corporation may decline and its prospects may deteriorate.
This selling will be automatic but the president may decide to restructure his investment fund and make manual transactions. Selling is limited to 1% to 2% of the shares of a corporation and more selling is possible when the offered shares have been (partially) sold.
18. Public Corporations - Target Ownership [ top ]
It is possible for presidents and CEOs to set target ownership percentages for their public corporations. This function is available from the share market page.
A president (or a CEO) can set a target percentage for each of her public corporations and shares will be automatically offered on the market or bids will be issued to purchase shares.
Setting the target to 0 means that the owner is trying to sell all his shares in the corporation Setting the target to 100 means that the owner is trying to pull the corporations from the share market. In case the owner is a president, the corporation will become a state corporation. In case the shareowner is a CEO, the corporation will become a private corporation.
Setting targets means that many shares can be offered or many bids may be issued. As this process is automatic, it can cause the share price to fall heavily or in case of many bids, to increase significantly. If the shares remain unsold, prices keep falling. If bids remain in the market with no offers to sell, share prices will increase each game month.
The offering and bidding of shares is limited by general parameters that also apply to manual transactions. An example of such limitation is that shares cannot be offered on the market if a high percentage of the shares of the corporations are already offered and there are no buyers. Similar limitations are in place for the case that too many bids to buy shares have been made and there are no sellers.
Pension funds in the game are programmed to buy and sell shares if some conditions are met (mainly driven by the P/E ratio). When share prices are increasing, some pension funds will automatically start selling and cash a profit.
When share prices are falling, and P/E ratios are lower, shares become more attractive and pension funds will increase purchasing.
It is up to the shareowners to define their strategies. Trading just became easier.
19. Share splits and reverse splits [ top ]
Share values in Simcountry can reach very high or low values. In the real world, when share values increase to very high levels, companies split their shares 1 to 2 or any other form they choose for.
A share split of two for one means that every share owned in the corporation is split into two shares. As a result, the number of shares doubles but as the corporation value does not change as result of the split, the value of the shares is cut by two.
A share split does not have any consequence for the value of corporations, the PE value remains the same as value is cut by two and profit per share is also cut by two because there is a double number of shares.
We have chosen to automatically split shares two for one if their value is higher than 100. Shares that have a value of 1000 will be split two for one several times and will end up with a value between 50 and 100.
Shares with very low value will be reverse split meaning that for each two shares, the shareholders will have one but its value will double. The numbers of shares are all cut by a factor of two but again, the total value is not changed, PE ratio remains unchanged.
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