Is stock capital increase a good idea? Before understanding cash capital increase, first clarify these three questions

Many investors panic when they hear that a company is conducting a cash capital increase—some see it as a positive, others worry about share dilution. In fact, a cash capital increase itself is neither good nor bad; the key depends on three factors: what the company plans to do with the money, how the market perceives this plan, and whether you as an existing shareholder will be diluted.

Let’s start with the basics.

What is a cash capital increase? How does it affect your shares?

The essence of a cash capital increase

A cash capital increase means the company issues new shares to existing shareholders to raise funds. It sounds simple, but behind it are considerations of capital structure, shareholder rights, and even the company’s future development direction.

Why does the company do this?

Companies choose to raise capital for several reasons: to expand operations, invest in new projects, repay existing debt, adjust financial structure, or respond to sudden challenges. Different purposes often lead to very different market reactions.

The process of a capital increase looks like this

1. The board of directors approves the plan, setting the target amount and share price
2. The company announces the details to shareholders, including the number of shares, price, and subscription deadline
3. Shareholders decide whether to participate and complete payment before the deadline
4. The company calculates the actual subscription amount and issues new share certificates
5. Shareholder registration is completed, and the new shares become effective

The entire process seems straightforward, but each step influences the final outcome.

Why does the share price sometimes rise and sometimes fall after a capital increase? Three decisive factors

The impact of a cash capital increase on the share price is not fixed. Investors often mistakenly think of it simply as positive or negative; in reality, it depends on the following three points:

Factor 1: The battle between stock supply and market demand

A capital increase increases the number of shares in the market. If the supply of new shares exceeds investors’ willingness to buy, the excess supply will push the price down. Conversely, if the market is eager to buy the new shares, the share price may be driven higher.

Factor 2: Market confidence in the capital increase plan

Investors ask: Where will the money be used? How much return can it generate for the company?

• If the market believes the funds will be used effectively to promote growth, the response is positive, and the share price is more likely to rise
• If there are concerns that this is just a form of emergency financing or that management lacks execution capability, the market may react skeptically, and the share price could drop

Factor 3: Whether existing shareholders’ ownership is diluted

This is the most easily overlooked but most important point.

Suppose you hold 100 shares, and the company conducts a 50% capital increase. If you do not participate in the subscription, your ownership proportion will automatically be diluted. Even if the company’s stock price rises, your rights and interests might not improve as expected. Conversely, if you and other existing shareholders actively participate to maintain your original ownership proportion, the risk of dilution can be significantly reduced.

Real case 1: Tesla’s capital increase insights

What happened in 2020

Tesla announced a new share issuance worth about $2.75 billion, with a price of $767 per share, aiming to raise funds for global expansion and new factory construction.

Market expectations vs. actual trend

According to conventional logic, issuing new shares should cause dilution and pressure the stock price downward. But Tesla did not. Why?

Because at that time, market confidence in Tesla was sky-high. Investors believed the funds would be used well—global demand for electric vehicles was booming, and Tesla needed capacity expansion. The new factories were seen as strategic necessities. So, when the news of the capital increase came out, the stock price actually surged.

Lesson learned

Tesla’s case shows us that a capital increase itself does not determine the stock price direction; rather, it is the market’s assessment of how effectively the funds will be used. If the market believes the money is being used wisely, investors are willing to pay for the company’s growth.

Real case 2: TSMC’s stable capital increase

Decision at the end of 2021

On December 28, TSMC announced a cash capital increase to raise funds for expanding its business. After the announcement, the stock market responded enthusiastically, and the stock price rose accordingly.

Why is the market not afraid of dilution for TSMC?

There are several reasons:

First, TSMC, as the global leader in semiconductor foundry services, has impeccable performance and operational stability. Under this background, existing shareholders strongly support the company’s capital increase plan and choose to subscribe to new shares to maintain their ownership ratio.

Second, the purpose of TSMC’s capital increase is clear—expanding factories, R&D, and next-generation process layout. These investments directly impact the company’s long-term competitiveness, and the market views them as strategic and necessary.

Finally, with high shareholder support, stable ownership proportions, and clear future profit expectations, the market is giving a vote of confidence rather than doubt.

Lesson learned

When a company’s fundamentals are strong, the purpose of the capital increase is clear, and shareholder support is high—these three conditions together can turn a capital increase into a boost for the stock price.

The dual nature of stock capital increases: advantages and risks

Benefits of capital increases

• Fast financing: no need to rely on bank loans, directly raising funds from shareholders
• Strengthen financial health: increase capital, reduce debt ratio, improve credit rating
• Signal growth confidence: the market often interprets a capital increase as a sign that the company is confident and willing to expand

Risks of capital increases

• Share dilution: issuing new shares can potentially reduce earnings per share; if existing shareholders do not participate, their ownership will be diluted
• Uncontrollable market reaction: even with a well-planned plan, market doubts can lead to sell-offs
• Financing costs: besides issuance costs, if the capital is raised at a price below the market value, it effectively lowers the company’s valuation

When can you actually receive the new shares after a capital increase?

Many investors overlook an operational issue: after participating in a capital increase, when can they actually hold the new shares?

Time delays come from several steps

First: the company’s deadline

The company sets a subscription deadline. Only payments made within this period are valid. Late payments are not accepted.

Second: exchange approval

If the company is listed on an exchange, the new share issuance must be approved by the exchange, which can take several weeks to months.

Third: shareholder registration

The company needs to complete shareholder register updates and transfer procedures, which may take 2-4 weeks.

Practical situation

The entire process usually takes 1-3 months. During this period, your funds have been paid out, but the new shares have not yet been credited. The market can change significantly during this time. That’s why thorough research before participating is essential.

Should you participate in a cash capital increase? An investor decision framework

Ask yourself these questions

1. Where will the funds be used? Will it bring real growth to the company? Is the purpose clear?
2. Is the subscription price reasonable? Is it significantly below the market price (which would cause dilution)?
3. Can I endure the waiting period? It may take 1-3 months from subscription to receiving the new shares. Am I willing to bear the risk during this time?
4. What if I do not participate? How much will my ownership be diluted if I skip the subscription?
5. What about the company’s fundamentals? The stock price may fluctuate in the short term, but what is the company’s growth outlook over the next 3-5 years?

Overall judgment

A cash capital increase is neither inherently positive nor negative; everything depends on the purpose of the increase, market confidence, and your assessment of the company’s future. The Tesla and TSMC cases teach us that when a company’s fundamentals are strong, the purpose of the increase is clear, and market confidence is high, a capital increase can often drive the stock price upward. Conversely, if the purpose is vague, and market confidence is lacking, the stock may face downward pressure.

Rather than passively waiting for the market to decide, it’s wiser to do your homework, understand the company’s strategy, and evaluate the risks—this is the most prudent attitude toward a cash capital increase.