KEY TAKEAWAYS
- In the short term, a capital increase often has a negative impact on the share price. The share price therefore often falls immediately once a capital increase is announced. In the medium to long term, however, the share price performance depends on how successfully the new capital is deployed in the company.
- If the existing shareholder exercises his subscription right, his percentage share in the company remains the same and he does not suffer any dilution effect from the capital increase.
Effects on the Share Price Development
Once a capital increase is announced, the company’s share price usually falls, as the supply of shares will be greater in the future than before, but demand will remain somewhat the same. After the capital increase, the value of the company is distributed over more shares than before, which thus makes each share less valuable. The dividend must now also be distributed over a larger number of shares, which can ultimately lead to a decline in the dividend yield if the existing shareholder does not exercise his subscription right. However, a large part of the share price loss usually occurs immediately after the announcement of the capital increase, which is why private investors are generally unable to react so quickly to the drop in the share price.
Reason for the Capital Increase
However, it is also important what the additional money raised is used for and how this is assessed by the market. If the money is used positively and sensibly from the market’s point of view, the share price may behave more stably than if the market views the increase in equity as negative. For example, the capital increase can be a negative sign that the company is in crisis and therefore needs additional money. On the other hand, the money can also be used to prepare future-oriented mergers or acquisitions, which the market may again view positively. If the company is in a deep crisis and suffers from illiquidity, which is why the company finally has to increase its capital, there may also be a real jump in the share price. However, this significant and brief rise in the share price is initially driven primarily by hope – whether the capital increase will lead the way out of the crisis remains to be seen.
Action by the existing Shareholder is necessary
With a capital increase, however, the existing shareholder is also often directly required to act accordingly. As already mentioned, the capital increase leads to a dilution of the profit. After all, there are more shares in circulation after the capital increase than before and the profit must from then on be distributed over more shares. As compensation, however, the existing shareholders usually receive a subscription right, with which they can acquire new shares in proportion to their previous shareholding. This subscription right gives the existing shareholders the opportunity to avoid dilution. The shares are offered to the existing shareholder at a more favorable price than the current stock market price. If a stock company carries out a capital increase, however, all existing shareholders are informed in advance of the precise details. To this end, the existing shareholders receive a notification that can be retrieved from their brokerage account.
Bottom Line
In the event of a capital increase, the share price usually falls because from now on the value of the share company is distributed among more shares than before. However, the share price often levels off again within a few days after the capital increase; after all, the company also receives fresh and additional money, which in the best case is used efficiently. For the existing shareholders who do not exercise their subscription rights, it is important to know that the higher the share price, the lower the effect of dilution. This is because the lower the share price, the more new shares the company has to issue in order to achieve the desired and required proceeds. If, on the other hand, a capital increase takes place while the share is quoted below book value, the lower the share price is quoted below book value per share, the more dilutive this capital increase would be for existing shareholders.