How to play with additional issuance? The underlying logic behind stock price fluctuations explained clearly once

When a company announces a capital increase in cash, the market often falls into a question: will this cause the stock price to soar or decline? There is no absolute answer; it depends on how the market interprets the purpose of this financing. This article will help you understand the stock price logic behind capital increases through real cases and market response mechanisms.

Tesla vs. TSMC: Same Capital Increase, Very Different Market Reactions

Tesla’s 2020 Capital Increase Case: The Purpose of Financing Determines Market Attitude

In 2020, Tesla announced a cash capital increase plan, issuing new shares worth approximately $2.75 billion, with a price of $767 per share. What seems like a simple financing move actually triggered a positive market response.

The key lies in Tesla’s market position at that time—investors were confident in its prospects, believing that this capital would be used for global expansion and new factory construction, further consolidating market share. Therefore, when the news of the capital increase was announced, the stock price did not fall; instead, it surged. This illustrates an important phenomenon: a capital increase itself is not the decisive factor for stock price movement; rather, market expectations of the company’s future profitability are.

TSMC’s 2021 Capital Increase Case: The Financing Logic of the “Guardian Mountain”

By December 28, 2021, Taiwan’s TSMC also announced a cash capital increase plan to raise funds for expansion. Similar to Tesla, the market responded enthusiastically, and the stock price rose accordingly.

As the world’s leading semiconductor foundry, TSMC’s operations and performance are relatively stable. Existing shareholders supported the capital increase plan, willing to participate further and maintain their shareholding ratio. This proactive participation of shareholders actually sends a signal to the market: the company is confident about future development. And this confidence ultimately translated into upward momentum for the stock price.

How Capital Increases Work: From Issuance of New Shares to Stock Price Response

What is a Cash Capital Increase?

A cash capital increase is a way for a company to raise funds by issuing new shares to existing shareholders to obtain additional capital. This process involves several steps:

First, the company’s board of directors approves the increase and sets a target amount. Then, the company sends a notice to shareholders, detailing the share price, number of shares, and total amount. Shareholders decide whether to participate based on the notice and make payments. After calculations, the company issues new shares to participants. Finally, the company’s registered capital increases, and shareholders’ ownership proportions are adjusted accordingly.

What direct impact does a capital increase have on stock price?

After the announcement of a capital increase, the market experiences three levels of response:

The first is supply-side change—the increase in the supply of new shares, which theoretically could exert downward pressure on the stock price.

The second is change in market expectations—investors evaluate the purpose of the capital increase. If the funds are used for expanding high-growth projects, the market may anticipate future earnings growth, supporting the stock price. Conversely, if investors worry about inefficient use of funds, it may trigger selling.

The third is restructuring of shareholder structure—if existing shareholders do not participate, their ownership proportion will be diluted, but if shareholders actively participate, they can maintain their influence.

Three Main Factors Supporting Stock Price Rise After Capital Increase

1. Strong Market Demand

If the new shares are highly sought after when issued, and investor demand exceeds supply, the stock price will naturally break upward.

2. Optimism About the Capital Increase Plan

When the market believes that the funds will be effectively used to generate future profits, the news of the capital increase can actually push the stock price higher. The cases of Tesla and TSMC both confirm this—investors confident in the company’s prospects are willing to accept short-term dilution of shares.

3. Active Participation of Existing Shareholders

If major existing shareholders, directors, and core shareholders actively subscribe to new shares to maintain their ownership ratio, this sends a strong confidence signal to the market, often leading retail investors to follow suit and push up the stock price.

Three Major Risks That Can Cause Stock Price Decline After Capital Increase

1. Market with Excess Supply

When the supply of new shares far exceeds actual market demand, the stock price faces significant pressure, and investors may choose to wait or sell in advance.

2. Doubts About the Capital Increase Plan

If the market doubts the efficiency of fund use, worries about poor project prospects, or perceives the capital increase as a short-term patch, the stock price may suffer a sharp decline.

3. Negative Expectations from Dilution

Minor shareholders who do not participate in the capital increase face a decrease in their ownership proportion. If they expect that the company’s future EPS will decline due to dilution, they may sell their holdings in advance.

The Double-Edged Sword of Capital Increase: Opportunities and Risks Coexist

Core Advantages of Capital Increase

Ample Development Funds—companies can quickly raise large sums through capital increase, used for business expansion, new project investments, or debt repayment, which is crucial for medium- and long-term growth.

Optimizing Capital Structure—increasing registered capital can improve debt ratios, enhance credit ratings, and reduce future financing costs.

Market Confidence Boost—successful capital increases are often interpreted as the company being confident in its prospects, attracting more institutional investors.

Potential Risks of Capital Increase

Dilution of Shares—issuing new shares inevitably reduces existing shareholders’ ownership proportion, especially when the issue price is below the market price, resulting in tangible losses for investors.

Uncertain Market Reaction—investors’ attitudes vary widely. Some see it as positive, others as negative; this divergence often causes stock price volatility.

Hidden Financing Costs—costs such as underwriting fees and issuance expenses, and if the issue price is below the market price, it can lead to a decrease in overall company value.

When Can Investors Receive New Shares After Participating in a Capital Increase?

After subscribing to a capital increase, investors usually need to wait some time before they can obtain the new shares. This period depends on several factors:

The company’s capital increase deadline—the company sets a deadline for investors to complete payment, after which calculations and registration are performed, usually taking several weeks to months.

Stock exchange review procedures—for listed companies, new share issuance requires approval from the exchange or relevant authorities, which may extend the waiting time.

Shareholder registration administrative process—the company needs to update shareholder data and rights registration to ensure new shareholders enjoy corresponding rights.

Before participating in a capital increase, investors should thoroughly evaluate the company’s fundamentals, the purpose of the capital increase, and the overall market environment, rather than judging stock price trends solely based on the capital increase. After all, a capital increase is just one of many factors influencing stock prices; the core drivers of long-term stock performance are the company’s profitability, industry prospects, overall economic conditions, and policy changes.