Capital raisings may cause share prices to decrease for several core reasons, primarily tied to dilution, valuation concerns, and investor sentiment. Here’s a clear breakdown:

1.  Dilution of Ownership

When a company issues new shares to raise money:

• Each existing shareholder owns a smaller percentage of the company.
• Unless the capital raised leads to proportionate earnings growth, earnings per share (EPS) will decline.
• This dilution lowers the value per share, even if the company’s total value (market cap) increases.

2. Shares Offered at a Discount

Companies usually offer new shares at a discount to the current market price to attract investors. This lowers the perceived value of all shares. Investors may expect the price to adjust downward toward the discounted level.

3. Signals Financial Stress or Strategic Risk

Raising capital, especially if it is unexpectedly, might signal the company is under financial pressure. It may also signal that the business is taking on risky projects or making acquisitions that require funding. This can reduce investor confidence, leading to a sell-off.

4. Short-Term Supply Overhang

More shares in the market will increase supply. If the demand doesn’t match the supply then the share price can potentially fall. Large institutional placements can flood the market and overwhelm typical trading volumes.

5. Uncertainty About Use of Funds

If management doesn’t clearly explain how the funds will create value it may make investors sceptical. Markets dislike uncertainty, which can result in a price drop.

Lauren Hua is a private client adviser at Fairmont Equities.

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