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When a DOW company offers a large number of stock for sale to raise funding for growth projects does price of existing shares general go up or down

  • If I get what you're saying, existing shares will increase. This is probably a company issuing stock warrants. – NuWin May 6 '16 at 0:47
  • As with most stock market issues, "it's not that simple". Imagine if your question was: "A company has launched a new product, will the stock price go up or down?" Answer .. who knows? – Fattie May 6 '16 at 16:09
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There is no single answer to this question and the outcome will depend on a number of factors.

In the case of a rights issue, where the issuing company is creating new shares and diluting the existing share holders share of equity, the effect on the share price will depend on the reason for raising funds and the markets perception of future returns arising from how the company puts the new funds to use. Rights issues are made at a significant discount to the share price at the time of the announcement. Existing shares holders are given the right to buy new shares at the discounted price in proportion to their existing share holdings, thus allowing them to maintain their share of equity. Of course, not all share holders exercise their right and the immediate effect is that the share price typically drops to near the discounted price when the announcement is made in anticipation of unexercised shares being offered in the market. If the market likes the prospects for the company's future use of funds raised, then the share price should recover fairly quickly. More often than not, the market remains sceptical and waits for the company to prove its worth resulting in a long period of lower share prices.

A less common case might be as follows : In the case of a large company, the issuance of new shares can have a positive effect on liquidity. Inclusion in the S&P500 carries certain liquidity requirements and the issuance of new shares may provide a boost to liquidity enabling the company to be added to the S&P500. This would have a positive effect on the share price since it will create demand for the shares by the big ETF and mutual funds. This type of situation is usually found when a family or institution has controlling interest in a company's shares and those shares are not available to provide liquidity.

EDIT

If may be worth mentioning that in this day and age it is considered preferable and more share holder friendly for a company to raise money for acquisitions and investment through borrowing. A company that raises money by issuing new shares is probably doing so because they cannot borrow at a reasonable rate - usually because they already have too much borrowing on their books. In this case, the company share price already carries a downward bias and a rights issue will generally exacerbate the situation.

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There are a couple of ways to issue said shares, but in the case of share dilution the existing share price typically goes down.

The demand can be great enough to keep the shares at the same price, and investors may have already discounted shares on the idea of the company raising more capital via share dilution, so the outcome can result in the price going higher after the news event is over with. Lower price for a smaller portion of the same company is what you would expect in share dilution.

Hope that helps!

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