Does cash capital increase really drive stock prices up? Investors' must-read logic for rises and falls

Many people see a listed company’s announcement of a cash capital increase and their first reaction is “The stock price will go up.” But in reality, it’s not that simple. When Tesla issued $2.75 billion in new shares in 2020, the stock price actually rose. TSMC announced a capital increase in 2021 and also experienced a rally. However, the underlying logic behind these two cases is completely different. Let’s first look at how cash capital increases actually affect stock prices—whether they go up or down—and what factors influence this.

Why Do Listed Companies Conduct Cash Capital Increases? The Key Lies in Purpose and Execution

The essence of a cash capital increase is that a company raises funds by issuing new shares. But why do this? There are several main reasons:

The company may want to expand its business scale, invest in new projects, pay off existing debts, strengthen its financial health, or respond to sudden market conditions. Simply put, the company needs money and believes that this money can create value in the future.

The complete process of a capital increase usually goes like this:

First, the board of directors decides on the scale and target amount of the capital increase. Second, the company announces to existing shareholders the price, number of shares, and subscription period. Third, shareholders decide whether to participate and make payments. Fourth, the company accounts for subscriptions and issues new shares. Fifth, after completion, the company’s capital increases, and the ownership proportion of existing shareholders may be diluted.

Why Can Stock Prices Fall After a Cash Capital Increase? Three Major Risk Factors

If cash capital increases generally have positive effects, why are some investors worried? Because these three situations can really drag down the stock price:

1. Oversupply Pressures and Lowers Stock Price
The supply of new shares suddenly increases, but market demand for these new shares is insufficient. The most direct result is downward pressure on the price. This is a simple supply and demand issue.

2. Investor Confidence Diminishes
If the market perceives the capital increase plan as bleak, with the offering price too low, or worries about the company’s future profitability declining, investors may sell off to express dissatisfaction. A decline in stock price becomes inevitable.

3. Dilution of Equity
The most direct harm comes from a decrease in ownership percentage. If existing shareholders do not participate in the capital increase, their voting rights and influence in the company are diluted. This sense of unfairness often triggers negative market reactions.

Why Can Stock Prices Rise After a Cash Capital Increase? Three Supporting Factors

But from another perspective, a capital increase can also boost stock prices:

1. Strong Market Demand for New Shares
If investors are eager to buy, and demand exceeds supply, the stock price can be driven higher.

2. The Capital Increase Gains Market Trust
When investors believe that the funds can generate high returns and promote company growth, they will rush in. Especially in a bull market, this optimism often reinforces itself.

3. Existing Shareholders Actively Buy
If major shareholders continue to subscribe to new shares to maintain their ownership ratio, this signals strong confidence in the company’s prospects and can drive the stock price upward.

Two Real Cases: Why Did Their Stock Prices Rise After Capital Increases?

Tesla’s 2020 Capital Increase Story

In 2020, Tesla announced a $2.75 billion capital increase at a price of $767 per share, aiming to fund global expansion and new factory construction. Logically, issuing new shares should dilute existing shareholders’ equity and cause the stock to fall.

But at that time, Tesla was extremely popular in the market, with retail and institutional investors full of confidence. They saw not “dilution,” but “the company needs this money to grow bigger.” The market believed Tesla could turn this capital into revenue growth and increased market share, so after the announcement, the stock price actually rose.

TSMC’s 2021 Major Capital Increase

At the end of 2021, TSMC announced a cash capital increase to expand operations by issuing new shares. As the world’s leading semiconductor foundry, TSMC has a solid financial position and long-term positive operational performance.

Market reaction was straightforward: this money in TSMC’s hands is the safest investment. Major shareholders are likely to subscribe to maintain their ownership. Because TSMC has high creditworthiness and strong future cash flow certainty, the dilution effect is fully offset, and the stock price actually increased.

What Do These Two Cases Teach Us?

The impact of a cash capital increase on stock price is 80% determined by the market’s perception of the company’s prospects, and only 20% by the act of increasing capital itself. Company fundamentals, industry outlook, economic cycles, policy trends—these factors together decide whether the stock ultimately rises or falls. Relying solely on the capital increase event to predict stock price is very easy to fall into traps.

The Double-Edged Sword of Cash Capital Increases: Pros and Cons

Advantages

First, the company can quickly raise the necessary funds for development, such as expansion, R&D, acquisitions, or debt repayment. Second, a capital increase can improve the financial structure, reduce debt pressure, enhance credit ratings, and lower future financing costs. Third, the market often views a capital increase as a positive signal, indicating confidence and resources for growth, which can push up the stock price.

Risks

Issuing new shares inevitably dilutes existing shareholders’ ownership and earnings rights. If the offering price is below the market price, the dilution effect is more pronounced. Market attitudes toward the plan are uncertain; if investors become skeptical, the stock price will drop accordingly. Additionally, issuing new shares involves costs such as underwriting and handling fees, which can reduce the actual efficiency of raising funds.

How Long Does It Take to Receive New Shares After Participating in a Cash Capital Increase?

In practice, investors participating in a cash capital increase need to wait before they can receive the new shares. The specific timing depends on several factors:

The company’s subscription deadline: The company sets a cutoff date for subscription, and investors must complete payment within this period. Afterward, the company needs to settle and register, which usually takes some time.

Stock exchange approval time: For listed companies, the issuance of new shares must be approved by the exchange, which can take several weeks.

Shareholder registration procedures: The company must update and register the shareholder register, which is also a legal requirement.

Overall, from payment to receiving new shares, investors typically need to wait one to two months. During this period, the original stock will continue trading, and its price may fluctuate. Therefore, investors should be mentally prepared; paying does not mean immediate receipt of new shares.

Final advice for investors: To judge whether a cash capital increase is beneficial or detrimental, the most important thing is whether the company itself is worth investing in. Fundamentals, competitiveness, industry outlook, management capability—these are the key factors that determine the long-term stock price trend. A cash capital increase is just an event; it should not be the sole basis for investment decisions.