Why do stock prices fluctuate differently after capital increases? An in-depth analysis of the underlying logic

Stock capital increase is a common method for companies to raise funds, but market reactions vary. Does the issuance of new shares directly boost stock prices, or does it bring downward pressure? This question has puzzled many investors. This article will analyze the relationship between stock capital increases and stock prices from multiple dimensions and verify theoretical deductions through real cases.

The Essence and Purpose of Stock Capital Increase

A stock capital increase refers to listed companies issuing new shares to existing shareholders or the market to increase company capital. The motivations for companies to conduct stock capital increases are diverse: business expansion, new project investments, debt repayment, optimization of capital structure, or responding to market changes.

The implementation process of a stock capital increase is relatively standardized: company discloses the capital increase plan → determines subscription price and number of shares → shareholders decide participation → funds are paid → new shares are officially issued → investor shareholding structure adjusts. The entire process requires regulatory approval and usually takes several weeks to months.

The Dual Impact Mechanism of Stock Capital Increase on Stock Price

A stock capital increase is not simply a positive or negative signal; its impact on stock prices depends on multiple interacting factors.

Supply and Demand Imbalance Pressure

Issuing new shares increases the circulating shares in the market. If the increased supply exceeds actual market demand, stock prices will face downward pressure. This dilution effect is especially evident when the capital increase price is below the market transaction price.

Changes in Investor Expectations

Market interpretation of stock capital increases is subjective. If investors believe the purpose of the increase corresponds to good future returns, they tend to buy to support the stock price; conversely, if they worry about dilution of rights or reflect company operational difficulties, they may choose to sell. Additionally, the participation level of existing shareholders also affects the extent of shareholding ratio changes.

Independent Impact of Company Fundamentals

It is important to emphasize that a stock capital increase itself cannot change a company’s short-term profitability. Its long-term impact on stock prices depends on the efficiency of the use of the raised funds. If the new capital is used for high-return projects or technological R&D, it paves the way for company growth; otherwise, it may become capital waste.

Three Conditions for Stock Capital Increase to Cause Stock Price Rise

Strong Market Demand for New Shares

When market liquidity is ample and investors are optimistic about the industry outlook, new shares are often quickly absorbed, supporting stock price increases.

Positive Investor Evaluation of the Capital Increase Plan

If the market believes that the funds from the increase can bring substantial business growth or technological breakthroughs, positive expectations will form, driving stock prices higher.

Active Participation of Original Shareholders in the Capital Increase

When existing shareholders subscribe to new shares to maintain their shareholding ratio, it indicates that management and major shareholders are confident in the company’s prospects. This “shared expectation” often attracts follower investors, boosting stock prices.

Three Risks of Stock Capital Increase Leading to Stock Price Decline

Excess Supply of New Shares

If subscription is insufficient or market liquidity is poor, and no one takes up the new shares after issuance, stock prices face the risk of decline.

Skepticism Toward the Capital Increase Plan

If the market worries that the increase reflects financial difficulties, poor management, or that the issuance price is too low, it will trigger a selling wave, causing stock prices to fall.

Passive Dilution of Shareholding Ratios

If existing shareholders do not subscribe fully to the new shares, their proportion of ownership decreases. Assuming the company’s total market value remains unchanged, the net asset value per share shrinks accordingly, objectively depressing the stock price.

Real Case Verification: Tesla vs. TSMC Comparison

Tesla Case (2020)

In 2020, Tesla announced a new share issuance of $2.75 billion, with a price of $767 per share, raising funds for global capacity expansion and new factory construction. Theoretically, this should pressure the stock price. However, the actual situation was opposite—market reaction was enthusiastic, and the stock price rose accordingly.

Why? At that time, Tesla was extremely popular, with investors generally optimistic about its electric vehicle prospects and global expansion strategy. Under strong market expectations, the issuance was interpreted as a “confidence signal” rather than a “dilution risk.” Investors believed the funds would help Tesla further increase market share and technological leadership, ultimately delivering excess returns. This case clearly shows that market psychology and expectations often have a greater short-term impact on stock prices than fundamental factors.

TSMC Case (December 2021)

At the end of 2021, TSMC, known as the “National Treasure,” announced a stock capital increase. The market responded positively, and the stock price rose accordingly. The key difference is that TSMC, as a global semiconductor foundry leader, has stable long-term operational performance and earnings, with shareholders confident in its prospects.

As a result, existing shareholders actively participated in the increase to maintain their shareholding ratio, reinforcing market confidence that management and major shareholders share a common view of future development. More importantly, TSMC has historically continuously invested in R&D and capacity expansion, and the new round of capital increase funds are also regarded as “strategic investments” rather than “financial difficulties.” Therefore, the market interprets the stock capital increase as a positive signal, pushing the stock price higher.

The common point in both cases is: under conditions of market confidence, stable or improving fundamentals, stock capital increases often serve as triggers for rising stock prices.

Weighing the Pros and Cons of Stock Capital Increase: Opportunities and Challenges

Advantages

Stock capital increase provides sufficient development funds for the company, which can be used for business expansion, new project investments, or mergers and acquisitions. From a financial perspective, increasing capital can also optimize debt structure, improve credit ratings, and reduce financing costs. When market sentiment is positive, a stock capital increase can even act as a catalyst for rising stock prices, signaling the company’s confidence in its future.

Disadvantages

The main risk of stock capital increase is dilution of existing shareholders’ equity. If the issuance price is far below the market price, the dilution effect will be more pronounced. Additionally, market reactions to the increase are uncertain; if investors evaluate the plan poorly, stock prices may decline. Third, stock capital increase involves handling fees, approval costs, and issuance expenses, which directly increase the company’s financing costs and may offset some of the benefits.

When Will Investors Receive New Shares After a Capital Increase?

After participating in a stock capital increase, when can investors obtain the new shares? This depends on three core steps:

Company Approval and Payment Deadline: The company sets a subscription deadline, and investors must complete payment within this period. Afterward, the company conducts capital increase accounting and share registration, usually taking 1-2 weeks.

Regulatory Approval: If the company is listed on an exchange, the new share issuance requires approval from the exchange, generally taking 5-10 working days.

Share Registration and Listing: After all approvals, the new shares are officially registered in investors’ names and become tradable. The entire process from payment to actual holding typically takes 2-4 weeks.

During the waiting period, investors should continue to monitor the company’s fundamentals, industry dynamics, and the overall economic environment, as these factors will directly influence the actual value of the new shares upon receipt. Stock capital increase is merely a short-term catalyst; long-term gains depend on the company’s operational capabilities.