Difference between the issuance price of the capital increase and the market stock price: Why does a discount phenomenon occur?

Companies have various ways to raise funds, but why does the phenomenon of cash capital increases below the stock price occur so frequently? What market logic is hidden behind this? This article will take you deep into the mechanisms of capital increase pricing, historical cases, and key factors investors need to pay attention to.

Mechanisms and Objectives of Cash Capital Increase

What is the essence of a capital increase?

A company raises funds by issuing new shares to existing shareholders, which is a cash capital increase. When a company needs to expand its business, invest in new projects, repay debts, or optimize its financial structure, it often adopts this approach.

Why do companies choose to increase capital rather than other financing methods?

Compared to bank loans, cash capital increases can strengthen the company’s capital base, reduce debt pressure, and improve credit ratings. This is why many growth-oriented companies prefer this method.

The complete process of a capital increase includes:

First, the company determines the scale and pricing of the increase, then issues a capital increase announcement (often with a discount below the stock price), shareholders decide whether to subscribe within a set period, and after payment, the company completes registration and issues new shares. The entire process usually takes several weeks to months.

Why is the capital increase price often below the market stock price?

Market reality of discounted issuance

When you see a company announce a capital increase, you’ll notice that the issue price is often below the market price at the time of announcement. This is not accidental but a calculated strategy. The design of cash capital increases below the stock price mainly aims to:

• Increase shareholders’ willingness to subscribe. A lower subscription price makes participating in the increase more attractive to shareholders because they can buy shares at a discount.

• Reduce market risk. A high issue price may lead to insufficient subscription, while a discounted issuance can ensure the achievement of fundraising goals.

• Maintain stability of equity structure. By setting a reasonable discount, existing shareholders are encouraged to participate, avoiding excessive dilution of ownership.

The dual impact of cash capital increases on stock prices

Supply shock

The issuance of new shares inevitably increases market supply. If market demand does not grow accordingly, the stock price may face downward pressure. This is a “dilution effect” that many investors worry about.

Market expectation response

Investors’ attitudes toward the capital increase determine the short-term trend of the stock price. If the market believes that the use of funds (such as developing new products or expanding capacity) can enhance the company’s future value, the stock price may rise; otherwise, it may fall.

Changes in shareholding ratio

Shareholders who do not participate in the increase will see their ownership proportion diluted. However, if existing shareholders actively subscribe to maintain their ownership ratio, this negative impact can be offset.

Insights from two typical cases

Case 1: Tesla’s aggressive expansion

In 2020, Tesla announced a capital increase, issuing $2.75 billion worth of new shares at $767 per share. At that time, Tesla was extremely popular, and investors were full of expectations for its global expansion plans. Despite the discount below the stock price in the issuance, the market reaction was unusually optimistic.

After the announcement, Tesla’s stock price did not fall but rose. The logic for investors was clear: the funds would be used for new factory construction and capacity expansion, and the short-term dilution effect was offset by long-term growth prospects.

But this case also reminds us that stock price movements involve multiple factors—corporate profitability, market sentiment, industry outlook, and macroeconomic conditions all influence the outcome. Relying solely on the capital increase event to predict stock price can lead to biased judgments.

Case 2: TSMC’s steady advancement

At the end of 2021, Taiwan Semiconductor Manufacturing Company (TSMC) announced a cash capital increase. As the global leader in semiconductor foundry services, TSMC’s plan was quickly recognized by the market, and its stock price rose accordingly.

TSMC’s advantage lies in its long-term stable performance and solid industry position. Existing shareholders supported the increase and actively subscribed to maintain their current ownership, reducing the negative impact of dilution. The funds raised were used for R&D and capacity expansion, seen as investments in future competitiveness.

Compared to Tesla’s high growth, TSMC demonstrates confidence brought by stability.

Advantages and risks of cash capital increases

Core advantages

• Capital accumulation: Companies can quickly raise large amounts of funds for business expansion, new projects, or debt repayment.

• Financial structure optimization: Increasing capital reduces debt burden, improves credit ratings, and lowers subsequent financing costs.

• Market signal: Capital increases are often seen as a sign of corporate confidence, helping to boost investor confidence.

Main risks

• Equity dilution: The issuance of new shares inevitably reduces earnings per share; if a large proportion of shareholders do not subscribe, their ownership stake will decline.

• Pricing risk: Although cash capital increases below the stock price with a discount can attract shareholders, if the discount is too large, it may indicate financing difficulties or uncertain prospects.

• Cost considerations: Issuance fees, handling charges, and other costs increase the total financing cost. If the issue price is significantly below the market price, it can directly erode company value.

Practical details investors should know

When can new shares be actually held?

It takes time from paying the subscription to holding the new shares. The company needs to set a subscription deadline, complete internal review and registration, and if listed, obtain approval from the stock exchange. The entire cycle usually lasts 4 to 8 weeks.

Decision points

Evaluate the purpose of the company’s capital increase—whether for growth investment or emergency financing. Study the discount ratio of the cash capital increase below the stock price; a large discount may imply risk signals. Pay attention to the subscription behavior of existing shareholders; active subscriptions indicate management confidence in the outlook.

Ultimately, stock price movements depend on whether the company can turn the financing into performance growth. The capital increase itself is just a tool; the key is how the funds are used.