Is a Capital Raise Good or Bad for Investors?

Despite potential dilution of shares, increases in share capital can be beneficial to investors. Companies raise capital for various reasons and it can be transformative. Learn more about how it works and its potential impact.

Is a Capital Raise Good or Bad for Investors?

Despite the potential dilution of shares, increases in share capital can ultimately be beneficial to investors. The company's capital increase obtained through the sale of additional shares can finance additional company growth. Companies raise capital for a variety of reasons, and the result can be transformative.

Capital raising

occurs when a company asks for additional money from investors.

Companies raise capital for a variety of reasons. These include financing, expansion, transforming operations, making an acquisition or modifying its capital structure. A capital increase occurs when a company approaches current and potential investors to request additional capital (money) in the form of equity or debt. In theory, capital raising to finance future growth and expansion should be good.

Raising capital to reduce debt in an otherwise fundamentally sound company should also be a good thing. However, in practice, capital collections of almost any kind and for any debt-related reason tend to lower stock prices. With appropriate studies, investors can make an informed decision about the potential impact of raising capital and whether or not they want to participate in it themselves. It is true that capital raising focused on reducing debt raises, first of all, the question of how the company became heavily indebted.

The process of raising capital involves companies estimating investor demand in relation to the type of capital they wish to issue and seeking the commitment of institutional investors. This allows the investor to take partial ownership of the company and, unlike debt, the funds raised do not have to be repaid. In such a scenario, dilution may cause some short-term problems, but long-term capital appreciation gains. These include raising share capital, providing liquidity to shareholders, leaving the first investors and increasing public awareness of the company.

Those with strong ethical credentials are better able to make an honest assessment, without their judgment being marred by the desire to obtain their fees regardless of the advantages of the investment offer and the conditions. As always, remember that when investing, the value of your investment may rise or fall and your capital is at risk.