# How does capital raising affect share prices?



## Panacea (22 June 2008)

Hi everyone. 

I've been searching for a while and can't quite find an answer to these newbie questions. 

When a company raises capital via a new issue or share purchase plan, the SP can subsequently fall due to 'dilution' of existing shares, right? How does this work... is it simply a matter of available shares (supply) increasing while buyers (demand) remain static, which drives the price down? Or is it something more tangible like the SP somehow being recalculated during the process?

Or... does it have something to do with the new shares being offered at a discount to the current price?

Thanks for any insights into this!


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## prawn_86 (22 June 2008)

*Re: How does capital raising effect share prices?*

As with anything in the markets there will be multiple views on this.

From and academic theorectical perspective:

If a co issues more shares, and raises cash, then the value of the existing shares will be diluted, meaning iven if the SP stays the same then in % terms the actual shares is worth less.

IE - Co ABC has 1000 shares on issue at $1 each. It issues another 100 at 80c. For the market cap to stay at the same level as it was before the issue, the price of the shares would drop to 91c. 
This however does not take the cash raised into account, but the market usually values cash at a discount. So in this example the price may be at about 95c in order for the precious market cap plus the $'s raised to be accounted for.


From a trading perspective:

Some "sophisticated investors" or even small holders are happy with short term profits. 
in the example above, those who gained shares at 80c may be happy to sell so a couple % profit. this creates selling pressure forcing the price down.


Realistically it is a combination of a number of things, and it is dynamic, just like the markets


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## Panacea (22 June 2008)

Thanks prawn_86. 

So from an investors perspective, if I own 10% of the company, and don't buy more during the issue, my stake (as a percentage) will fall and so will my cut of the profits...


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## prawn_86 (22 June 2008)

Panacea said:


> Thanks prawn_86.
> 
> So from an investors perspective, if I own 10% of the company, and don't buy more during the issue, my stake (as a percentage) will fall and so will my cut of the profits...




Correct


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## nioka (22 June 2008)

Panacea said:


> Thanks prawn_86.
> 
> So from an investors perspective, if I own 10% of the company, and don't buy more during the issue, my stake (as a percentage) will fall and so will my cut of the profits...



 Your share of the company drops BUT you probably still retain the same profit per share as before. The additional capital the company raises should be being put to good use and earning more for the company. Often because the company is using that money associated with a good business the profit per share should INCREASE. It is usually never a problem.


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## ninjatrader (22 June 2008)

nioka said:


> Your share of the company drops BUT you probably still retain the same profit per share as before. The additional capital the company raises should be being put to good use and earning more for the company. Often because the company is using that money associated with a good business the profit per share should INCREASE. It is usually never a problem.




yes, i would agree with that, it really depends on what the capital raising is for, it could be because they have reached a new milestone in the company's development and need the funds to take the company to the next level, say a company has discovered a new cure for a disease and have been successful in completing the trial, they may need the extra cash to fund the commercialisation of the new product, what's the point in getting this far and not commercialising their product? it would be a bad move if they didn't "ok, well, we've found the cure for cancer, oh but we don't have anymore funds, better give up now then!"


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## Speewha (24 June 2008)

Yes companies issuing more shares can dilute value, and yes in general when it all comes out of the wash everybody comes out nice and clean and smelling of roses.

The thing I find a little annoying is that especially with start ups, institutional and other sophisticated investors avoid getting involved from the start.

Many small unsophisticated punters put their money in go through what sometimes can be years of ups and downs. As soon as the” cure” is proven, regulated and ready for market an issue of new shares is made at a discount that generally excludes the unsophisticated who have helped get the stock to that point.

But I guess you have to just put up with this this and keep your eye on the end result.


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## ninjatrader (24 June 2008)

nobody ever put a gun to my head and said that i had to invest in the stock market, it's always been a choice, it isn't fair but i'm still glad i put in the time to learn and will continue to do so


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## stefan_invester (20 April 2011)

*Captial Raisings*

Hello
I was just wondering how the shareprice of a company behaves after a capital raising when the capital raised is intended for: 
Expansion of a mine
Resource drilling
Feasibility studies...

does anyone have experience with a company which has raised money for similiar reasons?
thanks


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## burglar (7 May 2011)

*Re: Captial Raisings*



stefan_invester said:


> Hello
> I was just wondering how the shareprice of a company behaves after a capital raising when the capital raised is intended for:
> Expansion of a mine
> Resource drilling
> ...




All you mention takes the company to a new level. So no real difference from previous posts.


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## Tyler Durden (14 March 2013)

Isn't this just like blackmail? If you don't throw in more money, then the value of your current shares gets diluted.


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## So_Cynical (14 March 2013)

Tyler Durden said:


> Isn't this just like blackmail? If you don't throw in more money, then the value of your current shares gets diluted.




There are elements of Blackmail about it, sometimes you can do ok long term even with out participation/averaging down...often the shares will trade under the issue price soon after ward, often by quite a bit .. FKP a recent example of this.

Sometimes the SP never falls to the issue price and your in the money straight up.


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## burglar (14 March 2013)

So_Cynical said:


> There are elements of Blackmail about it, sometimes you can do ok long term even with out participation/averaging down...often the shares will trade under the issue price soon after ward, often by quite a bit .. FKP a recent example of this.
> 
> Sometimes the SP never falls to the issue price and your in the money straight up.




If you're watching carefully, you can sell out! 
Then buy back in at a lower price.
RCF is an example of this.


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## Booboo2 (15 March 2013)

burglar said:


> If you're watching carefully, you can sell out!
> Then buy back in at a lower price.
> RCF is an example of this.
> 
> View attachment 51324




VEI had a cap raising in December@.34c.  Now at about double the price @.68 so a quick bagger there.


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