Is cash capital increase subscription really worth it? The truths and pitfalls investors must read

First, Understand: When Can You Receive Shares After Participating in a Cash Capital Increase

Many investors first want to know—after paying the money, when can they actually receive the new shares?

The usual process is this: after you make the payment, you need to wait for a period of time while the company completes internal accounting and registration procedures. If the company’s stock is listed on an exchange, the issuance of new shares also requires approval from the exchange, which can take additional time. The entire process typically involves the company’s set deadline for the capital increase, the exchange’s approval procedures, and shareholder registration, among other steps. So don’t expect to see the new shares credited immediately; patience is usually required until the company completes all procedures.

The Real Impact of Cash Capital Increase on Stock Price: Not Just Simple Rise or Fall

Many people think issuing new shares will necessarily lower the stock price, but the reality is much more complex. Stock prices are influenced by many factors; a cash capital increase is just one of them.

What happens? When a company conducts a cash capital increase, the number of shares in circulation increases, which is a supply-side change. At the same time, investors react based on their outlook for the company, which is a demand-side change. Additionally, the ownership proportion of existing shareholders may be diluted. These three factors intertwine and ultimately determine whether the stock price goes up or down.

Situations that lead to a decline in stock price:

• Excessive supply of new shares surpasses market demand, putting downward pressure on the price
• Investors worry that the capital increase will dilute their rights or doubt the efficiency of the company’s use of the funds
• Existing shareholders do not participate in the purchase, leading to dilution of their ownership percentage

Situations that push the stock price higher:

• Strong demand for the new shares, with investors willing to chase the price
• Investors optimistic that the capital increase will bring growth momentum to the company
• Major shareholders actively subscribing to maintain their ownership ratio

Two Real Cases: Why Do the Outcomes Differ So Much?

Tesla’s Story (2020)

Tesla announced a new share issuance of about $2.75 billion, with an issuance price set at $767 per share. At that time, the company claimed to raise funds to expand global manufacturing and meet growing market demand.

Logically, the news of a capital increase should scare off investors because increasing shares dilutes existing shareholders’ equity. But Tesla was extremely popular in the investment community at the time, and everyone was confident in it. After the announcement, the stock price didn’t fall; it rose. Why? Because the market believed that this money would help Tesla accelerate expansion, increase market share, and boost corporate value. The positive effects of the capital raise completely overshadowed the dilution effect.

This case illustrates one key point: the act of raising capital itself isn’t the main factor; what matters is market expectations about how the company will use the funds.

TSMC’s Story (December 2021)

As the world’s leading semiconductor foundry, TSMC announced a cash capital increase at the end of 2021. The market responded very positively, and the stock price rose accordingly.

Why? First, TSMC is a reputable industry leader with stable operations and solid performance. Second, existing shareholders believed that this capital increase would help the company go further, so they subscribed actively to maintain their ownership proportion. Third, although the capital increase itself doesn’t generate immediate profits, the funds are used for R&D, expanding factories, and investing in new technologies—laying the groundwork for future growth. For a financially strong company like TSMC, this outlook is recognized by the market.

Is Participating in a Cash Capital Increase Good or Bad? Clear Explanation of Benefits and Risks

Advantages:

Addresses genuine financing needs. Companies need funds to expand operations, invest in new projects, pay down debt, or restructure capital. Cash capital increase is the most direct way.

Improves financial structure. After increasing capital, the company’s debt ratio tends to decrease, credit ratings may improve, and future financing costs can be lowered.

Market perception may be positive. If investors believe the company is making the right moves, a capital increase can be seen as a positive signal, boosting the stock price.

Risks and disadvantages:

Your ownership will be diluted. If you do not participate in the new share subscription, your ownership percentage in the company will decrease, and earnings per share may be diluted.

Market reaction is uncertain. The same event can be viewed very differently by investors. If the market lacks confidence in the plan, the stock price may drop accordingly.

Additional costs increase. The company incurs fees for underwriting, issuance, and sometimes the issuance price is below the market price, which adds to the financing cost.

Decision-Making Tips: How to Judge Whether to Participate in a Cash Capital Increase

Don’t rush to make a decision based solely on the fact that a capital increase is happening. You should consider:

• Is the company’s fundamentals stable? Is it a profitable, high-quality enterprise, or a struggling one?
• Is the purpose of the capital increase clear? What will the funds be used for? Are these plans credible?
• What is the market environment like? Is the industry outlook positive? How is the macroeconomic situation?
• What are your own holding goals? Do you want to maintain your ownership ratio, or are you okay with dilution?

Only by comprehensively evaluating these factors can you make a decision that suits your situation. Never be misled by simplistic conclusions like “a capital increase means opportunity” or “a capital increase will dilute rights.”