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When a public company issues new shares, the total number of shares traded in a secondary market goes up. Assuming there is no change in the fundamentals of the company and the profitability, I would expect that the share price of the existing shareholders would fall. However, this does not always happen in real life.

A quick Google search says that a company can only offer new shares if they have "unissued capital". My questions are:

  1. When can a company issue new shares?
  2. How does it affect the existing shareholders?
  3. What changes in the balance sheet after such an issue?
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1 Answer 1

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Unissued capital is only a token restriction. When a company is incorporated a maximum number of shares is specified in the legal documentation. Most companies will make this an extremely large number so they never face that limitation. See here.

You wouldn't necessarily expect the stock price to change. The reason a company issues new stock is as a way to raise capital. Although new stock is issued, the cash raised by the sale becomes an Asset on the company's balance sheet. There's a good worked example in this Wikipedia article.

Following a rights issue the Liabilities of the company will increase to account for the increase in owner's equity, but the Assets will also increase by the same amount with the cash received.

Whether the stock price changes will depend upon what price the stock is issued at and on the market's opinions about the company's growth potential now it has new capital to invest. If the new stock is issued at the same price as the current market price, there's no particular reason to expect the share price to change. Again Wikipedia has more detail.

When new stock is issued it is usually offered to existing shareholders first, in proportion to their current holding. If the shareholder decides to purchase the new stock in full then their position won't be diluted. If they opt not to buy the new stock, they will now own a smaller percentage of the company as their stocks will make up a smaller part of the now larger number of shares.

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