The Truth About Cash Capital Increase Fluctuations: Case Analysis and Investment Decision Guide

Opening: Starting with the Stories of Tesla and TSMC

In 2020, Tesla released a news that shocked the market — planning a cash capital increase, issuing new shares worth about $2.75 billion, with a price of $767 per share. Normally, increasing share supply would dilute existing shareholders’ equity, and the stock price should be pressured downward. But the reality was surprising — Tesla’s stock price not only did not fall, but instead surged.

The same phenomenon also happened with TSMC. At the end of 2021, this semiconductor leader announced a cash capital increase to expand capacity, and the market immediately responded positively, with investors rushing to participate, pushing the stock price higher.

Why does the same cash capital increase result in such vastly different outcomes? What underlying logic is at play?

What Does a Cash Capital Increase Mean and How Does It Work?

Before diving into the case studies, we need to understand what a cash capital increase means.

Simply put, a cash capital increase is a financing method where a company issues new shares to existing shareholders to raise funds. This capital is usually used to expand business scale, invest in new projects, repay debt, or improve capital structure.

The complete process of a cash capital increase includes five steps:

1. The company’s board of directors approves, setting the target amount and price
2. Notification is sent to existing shareholders, detailing the number of shares, price, and subscription deadline
3. Shareholders choose whether to participate and make payments
4. The company accounts for subscriptions and approves the issuance of new shares
5. New shares are listed and traded, increasing the company’s registered capital and adjusting the ownership structure

This process may seem simple, but it influences multiple factors that affect stock prices.

Why Does a Cash Capital Increase Affect Stock Price? Three Main Mechanisms

Supply Side: The Double-Edged Sword of New Share Issuance

A cash capital increase directly increases the supply of shares. Under unchanged demand, increased supply generally exerts downward pressure on the price — this is basic economic principle.

However, if the market is full of expectations for the company’s capital increase plan and demand for new shares is strong, the increased supply may be quickly absorbed by the market, and the stock price can even rise.

Psychological Aspect: Turning Point of Market Sentiment

Announcements of cash capital increases are often seen by investors as signals. When investors believe the purpose of the capital increase is justified and the company’s prospects are optimistic, they interpret it as a positive signal. Tesla’s case is a typical example — the market believed that this money would drive global expansion and future performance growth, leading to a stock price increase.

Conversely, if investors doubt the necessity of the capital increase, worry about the efficiency of fund use, or question the company’s operational status, the stock price may decline.

Equity Aspect: Dilution Effect on Shareholding Ratio

A cash capital increase changes the proportion of shares held by shareholders. If existing shareholders do not participate or participate partially, their ownership rights will be diluted. But if existing shareholders actively subscribe to new shares to maintain their ownership ratio (as in the TSMC case), this proactive attitude itself can stabilize or support the stock price.

Three Scenarios Where Stock Price Drops After a Cash Capital Increase

Oversupply, insufficient demand: The volume of new shares issued exceeds the market’s absorption capacity, leading to excess supply and downward pressure on the stock price.

Pessimistic market expectations: Investors doubt the purpose of the capital increase, believing that the funds will be poorly used or that the company’s outlook is bleak, or worry that the increase will burden the company, causing the stock price to fall.

Severe dilution of ownership: Existing shareholders, due to costs or lack of confidence, do not participate in the increase, leading to a significant decrease in ownership ratio, and market concerns about deteriorating ownership structure push the stock price down.

Three Scenarios Where Stock Price Rises After a Cash Capital Increase

Strong market demand: Investors are highly optimistic about the new shares, subscribing enthusiastically, which drives the stock price up.

Clear use of funds and optimistic outlook: The company explicitly states the purpose of the funds (such as R&D, expansion, entering new markets), and the market believes this will bring tangible returns, which is reflected in the rising stock price.

Active participation of existing shareholders: Long-term shareholders strongly support and subscribe to new shares, maintaining or increasing their holdings, which is seen as a strong confidence signal and helps support the stock price.

In-Depth Case: Tesla’s Secret to Successful Cash Capital Increase

In 2020, Tesla announced a $2.75 billion new share issuance, which seemed risky. But why did the stock price instead rise?

First, the timing was right: Tesla was in a high-growth phase, and the market was full of expectations for its electric vehicles. In this context, the cash increase was interpreted as a positive signal of expansion.

Second, the purpose of the funds was clear: The company explicitly stated it would use the funds for global expansion and building new factories to meet market demand. This was not for emergency or filling gaps, but to seize growth opportunities, so investors supported it.

Third, investor confidence was strong: Tesla was extremely popular in the market, and investors believed management could effectively utilize the funds. This confidence offset the potential negative impact of increased supply.

Tesla’s case teaches us: The success of a cash capital increase depends on market confidence in the company’s prospects.

TSMC Case: A Model of Steady Cash Capital Increase

On December 28, 2021, TSMC announced a cash capital increase, which also received market enthusiasm. Why was this successful?

First, solid fundamentals: TSMC is the global leader in semiconductor foundry, with stable operations and performance, recognized as a blue-chip stock. This stability provided strong backing for the increase.

Second, high support from existing shareholders: TSMC’s major shareholders are mostly institutional investors and long-term holders who are confident in the company. They mostly participate in the increase to maintain their ownership ratio. This proactive subscription itself is a positive signal.

Third, the use of funds aligns with industry trends: TSMC plans to use the raised capital for R&D and capacity expansion, aligning with the rising global demand for chips. The market believes this investment will bring long-term returns.

Fourth, long-term performance support: TSMC’s past performance proves management’s execution capability. Investors believe this money will be used to further improve performance and accelerate growth.

The Full Picture: Advantages and Risks of a Cash Capital Increase

Advantages

Ample funding support: Cash increases can quickly raise large amounts of capital for business expansion, new projects, or debt repayment, which is crucial for company development.

Improved capital structure: Increasing registered capital helps reduce debt ratios, improve credit ratings, and lower future financing costs.

Market confidence boost: In a positive context, cash increases are seen as signs of a company’s ability to raise funds and confidence in growth, potentially pushing stock prices higher.

Risks

Dilution of ownership: Issuing new shares inevitably reduces existing shareholders’ ownership and per-share equity, especially if the issuance price is below market price, which is riskier.

Market reaction uncertainty: Market attitude toward the increase is influenced by many factors. If investors doubt the company’s outlook or fund use efficiency, the stock price may decline.

Additional costs: Issuing new shares involves paying fees such as underwriting and handling fees. If the issuance price is below market, it can harm existing shareholders’ interests.

Practical Process: When Can Investors Receive New Shares After a Capital Increase?

After investors subscribe to the increase, they usually need to go through the following steps to obtain the new shares:

Internal approval: The company confirms the subscription funds, accounts for the increase, which usually takes several weeks.

Exchange approval: If the stock is listed on an exchange, approval for the new share issuance is required, with review times varying by region.

Shareholder registration: The company completes shareholder registration, and the new shares are officially issued to investors’ accounts.

The entire process typically takes one to two months, depending on the company and region. Investors should be patient after subscribing and continue to monitor the company’s fundamentals.

How to Judge Whether a Cash Capital Increase Is a Positive or Negative Signal? Investment Decision Framework

When facing a cash increase announcement, investors can consider the following criteria:

Is the company’s fundamentals stable?: Are operations and performance maintaining a good trend? How effective is management?

Is the purpose of the increase clear and reasonable?: Is the capital used for growth investments rather than emergency needs?

Is the issuance price reasonable?: How does the subscription price compare to the market price? A very low price may harm existing shareholders.

What is the attitude of existing shareholders?: Are major shareholders and insiders participating? What is their subscription ratio?

Industry outlook and economic environment: Is the industry favorable? Does the macroeconomic environment support the company’s development?

Only when most indicators point positively can a cash capital increase be more likely to act as a catalyst for stock price growth.

Summary: Cash Capital Increase Does Not Guarantee Stock Price Rise

The meaning and role of a cash capital increase are far more complex than they appear. It can both boost and depress stock prices. The key lies in market confidence in the company’s prospects and the actual efficiency of fund utilization.

Tesla and TSMC’s success stories show that when a company has clear prospects, explicit fund use, and investor confidence, a cash increase often becomes a positive. But if these conditions are not met, the increase may be the beginning of a stock price decline.

Therefore, investors should not only look at the announcement itself but also analyze the company’s fundamentals, industry trends, and market sentiment deeply. Only then can they make wise decisions amid the opportunities and risks of cash capital increases.

Remember: a cash increase is a double-edged sword; success depends on whether the company can truly turn the raised funds into performance and value growth.