The truth about stock price fluctuations after capital increase: Insights from Tesla and TSMC on market reactions

Does a Cash Capital Increase Really Drive Up Stock Prices?

Many investors automatically assume that announcing a cash capital increase will lead to a rise in stock prices, but in reality, it’s much more complicated. A cash capital increase refers to a company raising funds by issuing new shares, usually to expand operations, invest in new projects, repay debt, or restructure capital. However, the impact of this new funding on the stock price varies depending on company prospects, market sentiment, and investor confidence.

Simply put, after the announcement of a capital increase, the market will assess: Can this money create value for the company? Or will it only dilute existing shareholders’ equity?

How Stock Prices Fluctuate During a Capital Increase: Three Key Factors

When a company announces a capital increase, three things happen simultaneously:

First, the circulating supply of shares in the market increases. If market demand doesn’t keep pace, oversupply can put downward pressure on the stock price.

Second, investors will evaluate the purpose and outlook of this capital increase. If they believe the funds will generate returns, the stock price may rise; otherwise, it may fall.

Third, the ownership proportion of existing shareholders may be diluted. If they do not buy additional shares to maintain their stake, their influence within the company will decrease.

Common situations where stock prices fall after a capital increase:

• Excess supply of new shares surpasses market demand, pressuring the stock price
• Investors doubt the feasibility of the capital increase plan, worried about future profitability
• Shareholders’ rights are diluted, weakening existing shareholders’ control

Situations where stock prices rise after a capital increase:

• The market is optimistic about the new shares, with strong buying momentum
• Investors believe the capital will create long-term value and growth opportunities for the company
• Major shareholders actively participate in the capital increase to maintain their ownership ratio

Tesla Case: Why Did the Stock Price Rise After a Capital Increase?

In 2020, Tesla announced a new share issuance worth $2.75 billion, priced at $767 per share, to raise funds for global expansion and new factory construction.

Typically, a capital increase dilutes existing shareholders’ equity, but Tesla’s case was different. At that time, Tesla was extremely popular in the market, and investors had high confidence in its future prospects. After the announcement, the stock price not only didn’t fall but actually surged.

Investors’ logic was simple: this $2.75 billion would be used for expanding factories and developing new technologies, helping Tesla capture larger market share and increase overall company value. So, despite the dilution of ownership in numbers, market expectations of value creation led to an upward movement in stock price.

However, it’s important to note that the performance of stock prices after a capital increase is influenced by many factors. Profitability, market sentiment, industry outlook, and macroeconomic conditions all affect stock movements. Relying solely on the cash increase to predict stock direction can easily lead to mistakes.

TSMC’s Capital Increase: Expansion on a Stable Profit Base

In December 2021, Taiwan’s TSMC announced a cash capital increase to raise funds for expanding its business footprint. The news was met with enthusiastic market response. Investors generally believed that the capital increase would provide sufficient resources for TSMC’s future development, and the stock price rose accordingly.

What makes TSMC different is its industry position and operational performance. As the world’s leading semiconductor foundry, TSMC maintains steady operations and resilient earnings. Many existing shareholders are likely to purchase new shares to maintain their stakes, preventing significant changes in ownership structure.

More importantly, the funds raised are used for R&D, capacity expansion, and technological upgrades, which will ultimately enhance competitiveness and future growth. Because investors believe the capital will generate tangible returns, the stock price responded positively.

The Dual Nature of Capital Increases: Advantages and Risks

Advantages of Capital Increase:

The most direct benefit is raising substantial funds to support business expansion, new project investments, or debt repayment. Additionally, increasing capital can improve financial structure, reduce debt burden, and enhance credit ratings, lowering future financing costs. Moreover, a capital increase is often viewed as a positive signal by the market, indicating the company’s financing ability and growth willingness, which can boost market confidence.

Risks of Capital Increase:

Issuing new shares directly dilutes existing shareholders’ ownership and rights, especially if the issuance price is below market value. Market reactions can be uncertain; if investors doubt the plan, the stock price may decline. Lastly, the process involves issuance and handling fees, which can impact overall company value if the terms are unfavorable.

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

After participating in a cash capital increase, investors typically go through the following steps before receiving new shares:

First, the company’s capital increase period. The company sets a deadline for payment, and investors must complete payment within this period. Second, the issuance of new shares requires approval from the stock exchange, which can take several weeks to months. Finally, the company conducts shareholder registration to confirm the identity and holdings of participating shareholders.

In summary, from payment to receipt of new shares, there is usually a waiting period. During this time, investors should monitor the company’s fundamentals and market dynamics rather than chasing short-term stock price fluctuations.