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Understanding the Effects of Capital Raising on Stocks before making any Decision

Mar 9, 2023

We often get asked about the impact of capital raising on ASX listed companies. While there are certainly positive and negative aspects to raising capital, it’s important to understand how it can affect both the company and its shareholders in the short and long term.

Positive and Negative Aspects of Capital Raising

  • Allows companies to raise funds for growth and expansion
  • Can dilute the value of existing shares and cause a short-term drop in stock price
  • Can increase financial flexibility and reduce debt
  • Can lead to loss of control or ownership by current shareholders

Positive and Negative Aspects for Shareholders

  • Can increase the value of shares over the long term
  • Can lead to a short-term drop in stock price
  • Can offer opportunities for existing shareholders to purchase additional shares at a discount
  • Can dilute the value of existing shares and reduce the value of their investment

8 Most Common Types Of Capital Raising

  • IPO: When a company wants to raise capital and become a publicly traded company, it offers shares to the public for the first time through an initial public offering (IPO). This process involves underwriters who help set the initial price of the shares and manage the sale of the shares to the public. IPOs can be a way for companies to raise significant amounts of capital and generate publicity, but they can also be risky investments for individuals.
  • Secondary Offering – A secondary offering occurs when a company offers new shares of stock to the public after its initial public offering. These offerings can be made for a variety of reasons, including to raise additional capital for expansion, to pay down debt, or to allow existing shareholders to sell their shares. Secondary offerings can also dilute the value of existing shares, as the total number of shares outstanding increases.
  • Rights Offering – A rights offering is an offering of new shares of stock to a company’s existing shareholders, allowing them to buy new shares in proportion to their current holdings. This type of offering can be an attractive option for companies because it allows them to raise capital without diluting the value of existing shares, while also giving current shareholders the opportunity to increase their stake in the company.
  • Private Placement or Institutional Placement – A private placement is a sale of securities to a select group of investors, such as institutional investors or high net worth individuals, rather than to the general public. This type of offering can be less expensive and less time-consuming than a public offering, but the company may have to comply with more restrictions on the sale and transfer of the securities.
  • Convertible Securities – Convertible securities are securities, such as bonds or preferred shares, that can be converted into common shares of stock at a predetermined price and time. This type of offering can be attractive to investors because they offer the potential for capital appreciation if the stock price increases, while also providing some downside protection through the bond or preferred share structure. For companies, convertible securities can be a way to raise capital without diluting the value of existing shares, while also providing some flexibility in terms of when and how the securities are converted into common shares.
  • Flow-through shares (FTS) – This is a type of capital raising that is specific to the mining industry in Canada. Flow-through shares allow mining companies to pass on the tax benefits of exploration expenditures to investors, who can then use the tax deductions to offset their own taxable income.
  • Mezzanine Financing – This is a hybrid of debt and equity financing that provides funding to companies that are not yet ready for a public offering. It is typically used to fund expansion or acquisition opportunities.
  • Bridge Financing – This is short-term financing that is used to provide funding for a company while it waits for a larger financing round to be completed.

Recent Examples Of Successful Capital Raising From Stocks That We Are Currently Trading

  • Flight Centre: Let’s take a look at Flight Centre’s recent $180 million capital raising to enter the luxury US and UK travel markets and fund the acquisition of Scott Dunn. Despite the offer being at a lower value than the current share price ($14.60), the stock price increased. This is because the market saw the potential for growth in earnings and expansion that the capital raising would bring. Flight Centre also offered further opportunities via SPP for retail investors, which increased investor confidence.
  • Sayona Mining: Despite the company’s announcement of a capital raising, the stock price did not drop as many traders would expected. Instead, the stock price went up. The explanation for this is that the capital raising was well-received by the market, and investors were optimistic about the future prospects of the company’s lithium projects. Additionally, the premium price (representing a 34% premium to Sayona’s last closing price) at which the FTS were placed may have indicated that the demand for the shares was strong and gave confidence back to investors showing that Sayona’s management has been also looking after current shareholders.

What to do when the stock goes in Trading Halt?

Before panicking when a company announces a capital raising, it’s important to understand the nature of the offer and how it may affect both the company and its shareholders, each offer will be different. As demonstrated by Flight Centre and SAYONA MINING, not all capital raisings have a negative effect on the stock. By understanding the types of capital raising and their potential effects, investors and traders can make informed decisions and potentially benefit from the opportunities they present, as VIP member you can always discuss with our analysts during trading hours the specifics of the Capital Raising before making any rush decision.

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The information provided by BG Trading to you does not constitute personal financial product advice. The information provided is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. BG trading recommends that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances. Past performance of any product discussed is not indicative of future performance. (We urge that caution should be exercised in assessing past performance. All financial products are subject to market forces and unpredictable events that may adversely affect their future performance).