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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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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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  • You mention that "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." But if a company issues lot's of new shares, but wastes that money on useless things (non-assets), not increasing cash flow, then the share price would decrease since there's more shared competing for the same volume of earnings.
    – Unconventional Wisdom
    Commented Dec 30, 2018 at 0:09
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    @NovelVentures If a company wastes all its money on useless things its share price will go down regardless if it sold more shares or not. What does this have to do with it?
    – Vality
    Commented Jan 1, 2019 at 10:16
  • if company sells the newly issued shares at market price (or higher), how could they find any buyers? But if they sold it cheaper, doesn’t it dillute the other shares?
    – maalls
    Commented Jan 24, 2020 at 5:05
  • @maalls BYND did it last year at below market rates and the value on the exchange quickly plummeted to match the valuation the shares were being offered for. So in that case they did "lose" money for their shareholders. On the other hand it was already considered to be wildly overpriced at the time so perhaps it was intended to be some sort of forced market correction
    – rdans
    Commented Feb 17, 2020 at 8:35
  • @maalls Buyers and sellers move the market by participating in the market. Just because you can buy $1000 worth of Microsoft at the current price doesn't mean you could buy $100M of Microsoft at the current price. A new issuance might allow you to take a stake in the company at a price lower than current owners would be willing to let go their shares at.
    – Chuu
    Commented Aug 31, 2023 at 15:28
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Let's say the company has a million shares valued at $10 each, so market caps is $10 million dollar = $10 per share. Actual value of the company is unknown, but should be close to that $10 million if the shares are not overvalued or undervalued.

If they issue 100,000 more shares at $10 each, the buyers pay a million dollar. Which goes into the bank account of the company. Which is now worth a million dollar more than before. Again, we don't know what it is worth, but the market caps should go up to $11 million dollar. And since you have now 1,100,000 shares, it's still $10 per share.

If the shares are sold below or above $10, then the share price should go down or up a bit. Worst case, if the company needs money, can't get a loan, and sells 200,000 shares for $5 each to raise a million dollars, there will be suspicion that the company is in trouble, and that will affect the share price negatively. And of course the share price should have dropped anyway because the new value is $11,000,000 for the 1,200,000 in shares or $9.17 per share.

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    Why are companies allowed to create and sell new shares at a price different from the current market price? This makes it unfair to the current shareholders. They should only be able to incorporate a separate fund entity (which doesn't have rights to the company's current earnings) to raise new shares at different prices. Otherwise they should be obligated to sell at market price.
    – Unconventional Wisdom
    Commented Dec 30, 2018 at 0:13
  • When you say "the actual value is unknown", what do you mean exactly? (i.e. why is it different from the market cap?). Put another way, what definitions of value allow it to be different from the market cap of the company?
    – Amelio Vazquez-Reina
    Commented Oct 27, 2019 at 20:40
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    Actual value = what the company would be found to be worth if you had complete information about everything. Market caps = last price of a share bought or sold, times number of shares.
    – gnasher729
    Commented Feb 17, 2020 at 22:47
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In simplest terms, when a company creates new shares and sells them, it's true that existing shareholders now own a smaller percentage of the company. However, as the company is now more valuable (since it made money by selling the new shares), the real dollar value of the previous shares is unchanged.

That said, the decision to issue new shares can be interpreted by investors as a signal of the company's strategy and thereby alter the market price; this may well affect the real dollar value of the previous shares. But the simple act of creating new shares does not alter the value in and of itself.

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    Your answer presumes that the newly issued shares would be sold at market price. If the shares are priced below market (for instance, if the company is in some distress and needs to make the deal attractive), then the value of the outstanding shares can change.
    – Chris W. Rea
    Commented Jun 27, 2015 at 16:10
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As others have posted, the company gains capital in return for its new shares.

However, the share price can still fall.

The problem is that the share marked is affected by supply and demand like any other marked. If the company just issues the new shares at marked price, they will have problems finding buyers. The people who are willing to pay that price has already bought as many shares as they want.

The company does this to raise capital, and depends on the shares actually selling for this to work. So, they issue shares at below marked price to attract buyers and the shares get diluted. In the end the share will usually end up somewhere between the old marked price and the issue price.

The old share owners are probably not too happy about this and will not accept this plan. (At least here in Norway, share issue has to be accepted at a shareholder meeting)

So, what is often done instead is to issue buy options for the required number of shares at the below-marked price. These options are given (for free) to the current share holders proportional to their current holding.

If everybody exercises their options they get new cheap shares that compensates for the loss of share value. If they don't have the capital themselves, they can sell the options and get compensation that way instead.

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