Is cash injection "favorable information" or "unfavourable information"? Understanding this article is enough.

When a listed company suddenly announces a cash increase, what is your first reaction? Many retail investors panic when they hear about new shares being issued - fearing dilution and a fall in stock price. But it's not that simple; although it's a capital increase, some companies' stocks hit the ceiling while others drop to the limit down. Where does the problem lie?

What is a cash increase?

In simple terms, the company is short on funds and decides to issue new shares to raise capital. The process is straightforward: the company decides on the amount of capital increase → notifies the shareholders → shareholders decide whether to participate → pay money to buy new shares → the company issues shares to you.

Why does a company need to increase its capital? The reasons are varied—expanding factories, repaying debts, developing new products, and responding to emergencies. The core logic is: the company believes this money can help it make more money.

Why does increasing capital not necessarily lead to a pump?

The announcement of capital increase will lead to three phenomena in the market:

The first phenomenon: Supply has increased. When a new stock is issued, the number of stocks in the market increases, which will put supply pressure on the stock price.

The second phenomenon: Investors begin to evaluate. The market will ask: Does this money really add value to the company? Or is it just a capital increase for survival?

Third phenomenon: Dilution of shareholding ratio. If you do not participate in the capital increase, your shareholding ratio will be diluted—from originally holding 1%, you may now only hold 0.9%.

Based on these three phenomena, stock prices may move in two directions:

The situation of stock price fall:

• There are too many new stocks, the market cannot absorb them, and the stock prices are being suppressed.
• Investors are not optimistic about this capital increase plan, fearing that the company will waste money.
• The old shareholders did not participate, their shareholding ratio was diluted, and they feel unhappy.

Situation of stock price pump:

• The market has a strong demand for new stocks, with people rushing to buy.
• Investors are optimistic about the use of this money and believe the company can make a profit from it.
• Existing shareholders actively participate to maintain their shareholding ratio, which is equivalent to a market vote in favor of this plan.

What do real cases say?

Tesla 2020 Capital Increase Plan

In 2020, Tesla announced a capital increase of $2.75 billion at $767 per share. On the surface, the capital increase would dilute shareholder equity, and the stock price should fall. But in reality? The stock price actually pumped.

Why? Because at that time, Tesla was the darling of the market, and investors saw that Musk wanted to use this money to expand production and build new factories, which everyone thought was a good idea. Everyone wanted to buy new shares, so the news of the capital increase actually became a positive signal - the stock price followed and pumped.

TSMC 2021 Capital Increase Plan

In December 2021, TSMC announced a capital increase. The market reacted enthusiastically, and the stock price also pumped. Why? TSMC's brand is valuable, its performance is stable, and its cash flow is abundant. Long-term shareholders are optimistic about the company's prospects, and many choose to participate in the capital increase to maintain their shareholding ratio. Additionally, the market believes that TSMC will use this money to expand its factories and invest in new technologies, which will bring better profits in the future, so no one is panicking.

Key differences lie here: Both Tesla and TSMC raised capital and experienced a pump, but the reasons are not entirely the same. Tesla's rise is fueled by the market's imagination about its prospects, while TSMC's is due to the market's confidence in its fundamentals. One relies on storytelling, the other on solid performance.

Advantages and Disadvantages of Capital Increase

The good side:

• The company can quickly raise money to expand or pay off debts.
• The increase in capital improves the financial structure, making banks more willing to lend you money.
• Successful capital increase equals market voting in favor, which adds to the company's credibility.

The downside:

• When a new stock is issued, the shareholding ratio of existing shareholders is diluted.
• If the capital increase price is lower than the market price, the retail investor will incur losses.
• If the capital increase plan fails or the market is pessimistic, the stock price may fall sharply.
• The company has to pay handling fees and issuance costs, which are not low.

When can I get the new shares?

Usually, it takes some time. The process is:

1. You pay the capital increase amount.
2. The company completes the accounting and internal procedures (takes time)
3. If listed on the exchange, it also requires approval from the exchange (which takes time)
4. The company conducts shareholder registration
5. Finally, the stocks will be issued to you.

So from the time you pay until you receive the stock, it may take a few weeks or even a few months. During this waiting period, the stock price may have already pumped or fallen.

One-sentence conclusion

Cash capital increase itself is neither bullish nor bearish; the key depends on three points: what the company will do with this money, whether investors believe it, and whether existing shareholders support it. If all three points are correct, the capital increase is like rocket fuel; even if one point is off, the stock price might take a hit. So instead of blindly following the trend, it's better to ask yourself first: Is this company really worth this price?