Will stocks go up or down after capital increase? Understanding these will prevent you from getting trapped

Stock capital increases are a common situation many investors encounter, but is a capital increase a good thing or a bad thing? Will the stock price go up or down? These questions actually have no absolute answer because they depend on many factors. Instead of guessing, it’s better to first understand the logic behind capital increases.

First, understand what a cash capital increase is

When a company needs money, besides borrowing from banks, it can also choose to issue new shares to raise funds. This is a cash capital increase — the company issues new shares to existing shareholders or the market to obtain additional capital.

Why do a capital increase? The reasons are simple:

• Expand business scale
• Invest in new projects or technologies
• Repay old debts
• Improve the company’s financial structure
• Respond to emergencies

The entire process of a cash capital increase can be understood as follows: the company decides on the amount to raise → announces the capital increase plan to shareholders → shareholders choose whether to participate → make payments → the company accounts and issues new shares → shareholders’ ownership percentage may change. This process seems simple, but the factors influencing stock price fluctuations are quite complex.

Why might stock prices fall after a capital increase? Three main reasons

1. Excess supply of new shares

A capital increase means the number of shares in the market increases. If the supply of new shares exceeds market demand, the stock price will face downward pressure. Simply put, more items mean each unit may be worth less.

2. Lack of investor confidence

If the market is skeptical about the capital increase plan, believing that the money will be used poorly or that the company’s prospects are uncertain, investors will sell off shares. Especially when the issuance price is far below the market price, panic can be triggered more easily.

3. Dilution of shareholders’ equity

This is the most direct impact. If existing shareholders do not participate in the capital increase, their ownership percentage will be diluted — the same number of shares now represents a smaller ownership stake in the company. This is bad news for long-term shareholders.

Stock prices may also rise after a capital increase; it depends on these three points

1. Strong market demand for new shares

If, after the news of the capital increase, the market rushes to buy the new shares, it indicates investor confidence in the company. When demand exceeds supply, the stock price will naturally rise.

2. Optimistic investor outlook

Some capital increases are for investing in high-growth projects or strategic expansion, which the market views as positive signals. Investors believe this funding can lead to future profit growth, pushing the stock price higher.

3. Shareholders actively participate to maintain their ownership

If existing shareholders are optimistic about the company, they actively participate in the capital increase to maintain their ownership percentage. This is a strong confidence signal. In such cases, the ownership structure remains stable, and the stock price is more likely to stabilize.

Two real cases: Tesla vs TSMC

Tesla’s capital increase story

In 2020, Tesla announced a cash capital increase, planning to issue new shares worth about $2.75 billion, with a price of $767 per share. Why do a capital increase? Because the company needed to expand factories worldwide to meet the rapidly growing demand for electric vehicles.

Logically, a capital increase dilutes existing shareholders’ equity, and the stock price should fall. But what actually happened? The stock price did not fall; it rose instead. Why? Because Tesla was extremely hot at the time, and the market was full of confidence in its prospects. Investors believed this capital could help Tesla capture market share and develop new technologies, significantly increasing the company’s value, so they bought more.

TSMC’s capital increase story

On December 28, 2021, TSMC announced a cash capital increase to accelerate capacity expansion. The market’s reaction was also positive — the stock price rose.

Why? Because TSMC’s position in the global semiconductor industry is unshakable, with stable operational performance. Investors were full of expectations for its capital increase plan. More importantly, major shareholders and institutional investors actively participated to maintain their ownership, further strengthening market confidence. Additionally, the funds raised are used for R&D and expansion, with significant potential for future growth.

These two cases show that the capital increase itself does not determine whether the stock price rises or falls; market confidence in the company is the key.

Benefits and risks of capital increases that investors must know

Advantages

• Fast fundraising: Capital increases allow companies to quickly raise large amounts of money for major projects or acquisitions
• Improve financial health: Increase capital, reduce debt ratios, and enhance credit ratings
• Signal positive prospects: Capital increases are often seen by the market as confidence in future development, helping to boost stock prices and investor confidence

Risks

• Dilution of equity: Existing shareholders’ ownership percentage decreases, weakening control
• Uncertain market reaction: If the market does not view the increase favorably, stock prices can fall sharply
• Increased financing costs: Issuance fees, handling charges, and other costs will increase; if the issuance price is too low, it can directly harm the company’s value

How long after a capital increase can investors receive the shares? A common question

Participating in a capital increase does not mean you get the new shares immediately. The specific timing depends on several steps:

1. The company’s capital increase deadline

The company sets a deadline for the capital increase, and you need to make payment before this date. Afterward, the company will perform calculations and internal procedures before issuing new shares to you.

2. Stock exchange approval process

If the company is listed on an exchange, the new share issuance requires approval from the exchange, which may take several weeks.

3. Shareholder registration and settlement

The company needs to register all participating shareholders, which also takes time.

In total, from deciding to participate in the capital increase to actually receiving the shares, it usually takes 1 to 3 months.

Final advice

A capital increase is just one of many factors affecting stock prices. The company’s profitability, market environment, industry prospects, economic conditions, and even policy changes can all have a profound impact on stock prices. Do not be fooled by news of a capital increase; it is essential to carefully study the company’s fundamentals and rationally assess its true value. A good capital increase should enhance the company’s value, not just cause short-term stock price fluctuations.