The truth about how additional issuance affects stock prices: What determines the rise and fall?

When it comes to cash capital increases, many investors’ first reaction is, “Will the stock price fall?” This question seems simple, but the answer is far more complex than it appears. Whether the stock price rises or falls after a capital increase actually depends on the combined effects of market sentiment, company fundamentals, and investor expectations, rather than the mechanical consequences of the capital increase itself.

Examining the Relationship Between Capital Increases and Stock Price in Real Cases

Tesla’s Capital Increase Experience

In 2020, Tesla announced a cash capital increase, issuing new shares valued at approximately $2.75 billion, with a price of $767 per share. According to conventional logic, increasing share supply should dilute existing shareholders’ equity, and the stock price would likely face downward pressure. But the actual outcome was unexpected — after the announcement, Tesla’s stock price did not decline; instead, it surged.

The key reason behind this rally is crucial: at that time, the market was full of confidence in Tesla’s future development. Investors generally believed that the funds would be used for global expansion, building new factories, and meeting the growing market demand. In other words, investors saw not “stock dilution,” but “the company is about to grow bigger and stronger.”

TSMC’s Capital Increase Case

On December 28, 2021, Taiwan’s TSMC announced a cash capital increase. The market responded enthusiastically, and the stock price rose accordingly. Similar to Tesla’s case, investors believed that this capital was vital for TSMC’s future expansion.

As the world’s leading semiconductor foundry, TSMC’s operational stability and performance are top in the industry. Shareholders strongly supported the capital increase, with many existing shareholders actively purchasing new shares to maintain their ownership ratio. This strong shareholder support became a driving force behind the stock price increase.

How Does a Cash Capital Increase Truly Affect Stock Price?

To understand the real impact of a capital increase on stock price, three core aspects must be considered:

First Aspect: Supply Shock

A capital increase means additional shares are introduced into the market. From a pure supply perspective, if demand remains unchanged and supply increases, prices tend to face downward pressure. But the stock market is not a simple commodity market; investor demand can also change alongside supply.

Second Aspect: Market Expectations

This is the decisive factor influencing stock price movements. Investors will reassess the company’s growth prospects based on the purpose and timing of the capital increase. If investors believe the funds will lead to earnings growth, their demand may increase, pushing the stock price higher. Conversely, if they are skeptical and think the company is in trouble and needs to finance itself, the stock price may decline.

Third Aspect: Changes in Shareholding Structure

A capital increase usually alters the proportion of shares held by existing shareholders. If current shareholders do not participate, their relative ownership will be diluted. However, if shareholders actively participate and buy new shares to maintain their proportion, this stable shareholder structure can actually boost market confidence.

Three Scenarios Where Stock Price Rises

Based on real cases and market performance, stock prices tend to rise after a capital increase in the following situations:

First, when there is strong demand for the new shares, sufficient buying can absorb the increased supply and even drive the stock price higher. The Tesla and TSMC cases both demonstrate this — robust market demand outweighs concerns about increased supply.

Second, if investors believe the capital will be effectively used for company development, such as expanding operations, investing in R&D, or entering new markets, this positive expectation can support the stock price. TSMC’s capital increase was used to boost capacity, which the market widely viewed positively.

Third, when existing shareholders strongly support the capital increase and purchase new shares, this unity reflects confidence in the company’s prospects and often serves as an endorsement for the stock price to rise.

Three Risks That Can Lead to a Stock Price Decline

However, capital increases also carry risks of causing a decline in stock price:

One, if the new share supply far exceeds market absorption capacity, the stock price will face significant downward pressure. The market cannot absorb so many new shares, and insufficient buy-in will push prices down.

Two, investor skepticism about the purpose of the capital increase can also lead to declines. Concerns about unclear financing goals, low capital efficiency, or signals of deteriorating fundamentals can weigh on the stock.

Three, direct dilution of shareholder interests can occur if the issuance price is below the market price or if existing shareholders cannot participate fully. Their proportional ownership and per-share value will be weakened, potentially causing short-term declines.

Pros and Cons of Cash Capital Increases

Advantages

From a company’s perspective, a capital increase can help raise substantial funds for expanding business, investing in new projects, repaying maturing debt, or strategic acquisitions — all vital for long-term growth.

Additionally, a capital increase can improve the company’s financial structure. Increasing capital reduces debt ratios, optimizes capital structure, and enhances credit ratings, thereby lowering future financing costs.

Third, market often views capital increases as positive signals, indicating the company’s ability to raise funds in the capital markets and confidence in its development. This signaling effect can enhance overall market valuation and push stock prices higher.

Risks

However, the drawbacks are equally important. The most direct impact is the dilution of existing shareholders’ equity. New share issuance reduces each shareholder’s proportion and earnings per share, especially if the issuance price is below the market price, intensifying dilution effects.

Second, market reactions can be unpredictable. Investor attitudes toward the capital increase may vary widely, making stock performance hard to forecast. If skepticism dominates, the stock may decline.

Third, issuing new shares involves costs such as underwriting fees and issuance expenses, increasing the company’s financing costs. If the issuance price is set too low, the net proceeds will be reduced, affecting the intended benefits.

When Will Investors Receive the New Shares After a Capital Increase?

Investors participating in a capital increase need to wait for a certain period before receiving the new shares. This timeline depends on several factors:

Company’s Capital Raising Process

The company typically sets a deadline for the capital increase, and investors must pay before that date. After raising funds, the company needs to perform internal procedures like fund verification and financial registration, which may take several weeks.

Exchange Approval Procedures

If the stock is listed on an exchange, the issuance requires approval from the exchange. Different exchanges have varying approval times, usually ranging from several business days to a few weeks.

Shareholder Registration Procedures

The company must complete registration of participating shareholders and, after the registration date, issue the new shares. The entire process from participation to holding the new shares generally takes 4 to 8 weeks.

Therefore, investors should be patient after participating and continue to monitor the company’s fundamentals and overall market performance.

Final Reminder for Investors

A capital increase is neither necessarily good nor necessarily bad. The ultimate movement of the stock price depends on multiple factors such as the company’s profitability, market outlook, industry development, and macroeconomic conditions. Relying solely on news of a capital increase to predict stock price direction often leads to pitfalls.

Smart investors should evaluate the capital increase comprehensively, considering the company’s financial health, management capability, specific use of funds, and industry trends. Only then can they make more rational and accurate investment decisions.