Will the stock price go up or down after the capital increase? Just look at these two real cases to understand.

When it comes to cash capital increases, many investors’ first reaction is “Oh no, we’re going to be diluted again.” But in reality, whether the stock price rises or falls after a capital increase isn’t a black-and-white answer. Today, we’ll break down the logic behind cash capital increases, using Tesla and TSMC as examples to show you why the stock price can be vastly different after a capital increase.

First, look at the cases: How Tesla and TSMC handle capital increases

Tesla’s 2020 Capital Increase Myth

In 2020, Tesla publicly issued new shares to raise funds, with an issuance scale of about $2.75 billion, priced at $767 per share. The goal was straightforward—use this money to expand factories worldwide, increase production capacity, and seize the rapidly growing electric vehicle market.

Theoretically, issuing new shares would lower earnings per share, diluting existing shareholders’ equity. But Tesla, being a star company at the time, had investors’ confidence sky-high. After the news of the capital increase was announced, the stock price didn’t fall; it actually surged. Why? Because the market believed this money could help Tesla further increase its market share and valuation.

TSMC’s 2021 Capital Increase Experiment

On December 28, 2021, TSMC announced a cash capital increase to expand its business footprint. The news was met with enthusiasm, and the stock price rose accordingly. As the world’s leading semiconductor foundry, TSMC’s solid operational performance garnered strong support from existing shareholders, who bought new shares to maintain their ownership ratios.

The clever part of this capital increase was that, even before the funds were in place, the stock price was driven up because the market was optimistic that the capital would be used for R&D, plant expansion, and new technology investments—foundations for future growth.

Why do cash capital increases sometimes cause stocks to rise and sometimes fall?

After reviewing these two cases, you might ask: same type of action, different results. Essentially, three factors determine whether the stock price goes up or down.

First layer: The supply of new shares

A capital increase increases the number of shares in the market. If the supply of new shares exceeds investor demand, the stock price tends to decline. Conversely, if demand for the new shares is strong, the stock price may rise.

Second layer: Market sentiment and purpose of the capital increase

Investors’ attitude toward the capital increase plan itself matters. If they believe the capital is for big projects and future growth, they’ll be optimistic; but if they suspect it’s to cover losses or pay off debts, the stock price will be pressured downward. For example, Tesla and TSMC’s capital increases were seen as “to seize development opportunities,” so the market reacted positively.

Third layer: Changes in shareholder structure

This is an often-overlooked aspect. If existing shareholders strongly support and continue to participate in the capital increase, the new shares are absorbed, and ownership ratios remain stable, so there’s no concern about dilution. But if old shareholders are indifferent and new shares find no buyers, that’s problematic.

Three scenarios where stock prices rise after a capital increase

Scenario 1: Strong market demand

High demand for new shares leads to a premium purchase, often pushing the stock price higher after the increase.

Scenario 2: Investors optimistic about the purpose

Investors believe the funds will generate good returns, supporting the company’s development. The news of the capital increase becomes a positive signal, and the stock price rises.

Scenario 3: Shareholders actively participate, ownership remains stable

Existing shareholders actively buy new shares, absorbing them, and the ownership structure stays stable, alleviating concerns about dilution.

Three scenarios where stock prices fall after a capital increase

Scenario 1: Excess supply of new shares

Too many new shares surpass market demand, leading to selling pressure on the stock.

Scenario 2: Pessimistic investor attitude

If the market doubts the purpose of the capital increase, fearing dilution or profit decline, the stock price can drop.

Scenario 3: Dilution of existing shareholders’ holdings

Shareholders who do not participate see their ownership percentage decrease, sending a negative signal that pressures the stock price.

Advantages and risks of capital increases

Benefits

First, it allows the company to quickly raise large amounts of capital for expansion, new projects, debt repayment, or acquisitions. Second, increasing equity can improve financial structure, reduce debt burden, enhance credit ratings, and lower financing costs. Lastly, announcing a capital increase can be seen as a positive signal, indicating the company’s ability and determination to grow, which can boost stock price and market confidence.

Risks

The most direct risk is dilution—existing shareholders’ ownership percentage decreases. Second, market reactions are unpredictable; if investors lack confidence in the plan, the stock price can fall. Third, capital increases incur issuance and handling costs. If the issuance price is below the market price, it may also lead to a reduction in the company’s valuation.

When can investors receive the new shares after a capital increase?

Investors participating in a capital increase usually want to know how long it takes to receive the new shares. Generally, the timing depends on several factors:

The company’s schedule for the capital increase

The company sets a deadline for the capital increase, and investors must pay before that. Afterward, the company needs time for registration and accounting before issuing new shares.

Stock exchange approval process

If the stock is listed on an exchange, the issuance must be approved, which can take several weeks or months.

Shareholder registration procedures

The company must register participating shareholders, which also takes time.

In summary, investors need patience to complete these processes before receiving the new shares. During this waiting period, they should continue monitoring the company’s fundamentals and market conditions rather than making decisions solely based on the capital increase.

Conclusion: Don’t just look at the capital increase, consider the overall situation

After all this, the most important point is that whether the stock price rises or falls after a capital increase is not determined solely by the increase itself. The company’s profitability, market sentiment, industry outlook, macroeconomic environment, and policy changes all influence stock price movements. Relying solely on information about a cash capital increase to predict stock price is very risky.

Investors should view a capital increase as a signal of the company’s development, and combine it with fundamentals, industry trends, and macroeconomic factors to make more reliable investment decisions.