How much do you know about the disadvantages of cash capital increase? The truth behind stock price fluctuations

When listed companies announce a cash capital increase, many investors are guessing one question: will their stocks go up or down? The answer is not absolute, because the impact of a cash capital increase on stock prices depends on multiple complex factors. This article will analyze from the investor’s perspective the operating mechanism of cash capital increases, potential risks, and the logic behind real cases.

What is a cash capital increase?

A cash capital increase refers to a listed company’s issuance of new shares to existing or new investors to raise funds. Companies usually choose this method to expand business scale, invest in new fields, repay debts, or optimize capital structure. The process includes: the company determines the increase amount → announces the capital increase to shareholders → sets the subscription price and deadline → shareholders decide whether to participate → after funds are received, new shares are issued.

How does a cash capital increase affect stock prices?

A cash capital increase does not necessarily boost stock prices; instead, the rise or fall of stock prices is jointly determined by multiple factors. The key lies in understanding three core mechanisms:

Stock supply impact: The issuance of new chips increases the total number of stocks in the market. If demand for new chips is insufficient, increased supply will exert downward pressure on the stock price. Conversely, if investors are optimistic about the company’s prospects and demand for new chips is strong, it may support the stock price.

Market psychological response: Investors interpret the capital increase plan differently. If they believe the increase is used for strategic investments or technological upgrades, the market may react positively; but if they worry about inefficient use of funds or dilution of existing shareholders’ interests, the stock price may decline.

Equity structure change: If existing shareholders do not fully subscribe to the new chips, their ownership proportion will be diluted, potentially triggering negative expectations. On the other hand, if major shareholders actively subscribe to maintain their ownership ratio, it indicates confidence in the company and helps stabilize the stock price.

Two completely different cases

Tesla’s expansion story (2020)

In 2020, Tesla announced a cash capital increase plan, issuing $2.75 billion worth of new chips at a price of $767 per chip. The fundraising aimed to support global capacity expansion and new factory construction.

Logically, one might think that the increase would dilute existing shareholders’ equity, but Tesla’s situation was unusual. At that time, the market was very confident in Tesla’s growth potential, and investors generally believed that this capital would drive the company toward larger market penetration and technological innovation. As a result, the stock not only did not fall but rose after the announcement. This reflects an important phenomenon: when a company’s growth story is compelling enough and the purpose of funds is clear, a capital increase can be seen as a positive signal.

TSMC’s steady expansion (December 2021)

TSMC announced a cash capital increase plan at the end of the year to expand chip manufacturing capacity. The market reaction was also positive, and the stock price rose accordingly.

TSMC was able to successfully carry out the increase because of its solid market position, excellent financial performance, and industry-leading technology. Existing shareholders had strong confidence in the company and mostly chose to subscribe to new chips to maintain their ownership proportion. This high subscription rate further confirmed investors’ expectations for the company’s future, creating a positive cycle. It is worth noting that a cash capital increase itself does not immediately increase profits, but if the funds are used for R&D, capacity expansion, and new technology investments, it lays the foundation for future growth.

The pros and cons of cash capital increases

Although cash capital increases can provide urgently needed funds for the company, investors must recognize the potential risks:

Equity dilution risk: The issuance of new chips directly reduces the ownership percentage and earnings per share of existing shareholders. If the issuance price is below the current market price, the dilution effect will be more pronounced, potentially causing substantial losses to shareholders.

Uncertainty in fund use: Management’s commitment to raising funds and actual execution often differ. The funds may not generate expected returns due to poor decision-making, market changes, or mismanagement. This capital allocation risk can exert long-term pressure on the stock price.

Market confidence fluctuations: Announcements of a capital increase will trigger reassessment of the company’s prospects, a process full of variables. If the market interprets negatively (e.g., believing the company is desperate for financing indicating financial trouble), the stock may experience short- or medium-term adjustments.

Increased financing costs: Capital increases involve underwriting fees, approval costs, and other expenses, which eat into the net financing amount. If the pricing is too low, it can amplify financing costs and reduce capital efficiency.

When can investors receive new chips?

Investors participating in a capital increase usually go through the following steps before holding new chips:

First is the subscription period, during which the company sets a clear deadline for subscription, and investors must complete payment within this period. Next is the review and verification stage, where the company verifies subscription amounts, identifies duplicate subscriptions, and handles accounting, which typically takes several weeks. Then is the exchange approval process; if the company is listed on an exchange, the new chip issuance must be approved by the exchange, involving multiple compliance checks. Finally, the shareholder registration process, where the company records new shareholder information in the shareholder register and issues stock certificates or electronic records.

The entire process from subscription to receiving new chips usually takes one to three months. During this period, investors should keep an eye on company announcements to stay informed about progress. Meanwhile, doing thorough research on the company’s fundamentals, industry trends, and economic cycle position is equally important to make rational decisions amid the complex landscape of cash capital increases.