Recently, I’ve been looking at some capital increase cases and suddenly thought of a question that many people get wrong: When a company announces a cash capital increase, should the stock price go up or down?

Actually, there’s no absolute answer to this question. I’ll first share two more representative cases so you can understand why.

In 2020, Tesla announced it would issue $2.75 billion in new shares, priced at $767 per share. Normally, when new shares are issued, existing shareholders’ equity gets diluted, and the stock price should fall. But you all know how hot Tesla was at that time, and the market was very optimistic that this money could help Tesla expand its factories and push forward new technologies. What happened? The stock price not only didn’t fall, it actually rose for a while. The investors’ logic was simple: this capital can enable the company to grow faster in the future, so buying now is a good deal.

Compare that with TSMC’s example. At the end of 2021, TSMC announced a cash capital increase to expand its footprint, and the market responded very positively. But TSMC’s situation was a bit different because it is already stable in operations and solid in performance. Most existing shareholders would support the capital increase plan and buy some new shares themselves to maintain their ownership ratio. So, the shareholder structure didn’t change much, and since the funds were used for R&D and expanding factories, the future growth path was well laid out.

From these two cases, we see that the impact of a capital increase on the stock price doesn’t depend solely on the increase itself, but on how the market perceives the use of that money. If investors believe this capital can bring good returns, the stock price will go up. Conversely, if the market worries that the capital increase will dilute their interests or doubts the company’s growth prospects, the stock price is likely to be pressured downward.

There’s also a often-overlooked factor: supply and demand. When new shares are issued, the supply of stocks in the market increases. If market demand for the new shares is insufficient, the stock price will naturally be under pressure. But if the market is eager to buy, the stock price can actually be driven higher.

Honestly, just looking at the impact of a cash capital increase on the stock price, it’s really hard to predict how the price will move. Company profitability, market sentiment, industry outlook, the overall economic environment, and policy changes—all these factors influence the outcome. The capital increase is just one variable among many.

So, if you’re considering whether to participate in a capital increase or want to judge the stock’s trend based on the news of a capital increase, the most important thing is to look at the company’s fundamentals and market trends. Don’t be led astray by superficial news about the capital increase; do your own homework and analysis. That way, you’re less likely to get caught in pitfalls.