Of course, if you are a small and medium investor, you will know that the capital increase is a process that is closely linked to equity markets. To the point that you can even earn money through these very special operations. It is true that a capital increase does not have to affect companies listed on financial markets. Of course not, but it is what we are going to deal with from now on so that you know what you should do each time one of these corporate events occurs.
The capital increase is substantially a financial operation aimed at increasing the own resources of a company in order to be able to finance new investments. That is, that is, its true purpose is collect resources to face your economic needs, Although in the financial markets it can have a double interpretation that is the key to determining whether or not it is beneficial for your interests as a retail investor. Because in fact, in many cases it is very difficult to know why a listed company enhances a movement of these characteristics.
In the first place, it can be for purely investment needs and in which case it can become a really profitable operation and where you can obtain large capital gains. On the other hand, it may also be the place to carry out a capital increase for cash needs. That is, you have no choice but to go to this accounting operation to receive monetary resources due to the bad business situation of the company. And this is the reason why they are very badly received by the financial markets. With a sales tax on purchases.
Capital increase: why?
These corporate movements are launched to an accounting need of the company itself. You need to expand abroad, access other lines of business or even because you want some monetary funds for your own subsistence. As you can see, there are many motivations for carrying them out and all of them of different nature. For this they may have different interpretations by financial agents Well, you have to address what is the purpose to execute them, especially in the financial markets. Beyond other technical considerations and maybe also from a fundamental point of view.
In any case, a capital increase is not just a movement in the stock marketsIt goes beyond these variables. Because it is not the same when a healthy company carries out a capital increase as when it is the last resort that companies have in a poor financial and accounting situation. Not in vain, and as you know very well they are received with different degrees of enthusiasm by small and medium investors. Here's what a capital increase can do be profitable and instead another not. When in reality they are exactly the same corporate movements.
What are the effects?
In all ways, it will be decisive to know in detail what are the derivations of what is constituted as a capital increase. Because it will give you the odd idea where your movements have to go from these precise moments. Not in vain, we are talking about the capital increase from the investment point of view and not from other more specific or technical ones that are intended for what is the analysis of the company. Well, before a movement of these characteristics do not have the slightest doubt that the affected company will be able to increase the capital under several strategies that are completely different and that we will expose you below.
The first and at the same time the most common of all is issuing new shares. Although with a double aspect and that is that they can be aimed at new shareholders or existing ones. This means that you have to read the conditions of the capital increase in great detail so as not to fall into any big mistake that you can pay dearly from now on.
Another of the systems used by companies to carry out a capital increase is increasing the par value of existing shares. It is a business strategy to which they resort more and more frequently because it is a way of creating value in the company or in the business.
A third is materialized with the charge to undistributed profits of the company. What does this really mean? Well, something as simple as that shareholders will not have to contribute money and in this way they will receive released shares. That is, completely free of charge and to the point of being a very profitable operation in most of the operations that operate under these special characteristics. Not in vain, you will not have to face any financial outlay and you will be able to increase your presence in the shareholders of the company affected by this capital increase.
What is the share premium?
Another of the most relevant aspects is that which has to do with the issue premium and which is very important to correctly understand what a capital increase is. In this sense, you will have no choice but to know that the issue premium is the surcharge to pay for a share in relation to its nominal or theoretical value. So you enter through this business strategy through some new actions. Or perhaps you may reinforce your positions with other shares that have been created after the start of the capital increase.
Generally this movement is materialized through what is known as subscription rights. But what are they really? Well, nothing less and nothing more than the financial instrument that you have more at hand for enter or strengthen your positions in a company, generally listed as you well know. Not surprisingly, the subscription right is what allows you to subscribe new shares at the precise moment of formalizing the capital increase in question.
Subscription right
Well, this figure is what allows you to take new positions in the company. Although of course, if you wish to not attend the capital increase, of course you will not be obliged at any time. If not, on the contrary, you can sell your rights at market price and in this way you will also be able to generate an economic benefit, although much more limited and in any case without joining the company through the new actions. It is one of the doubts that assail small and medium-sized companies when the capital increase is formalized. Where they do not know what to do with their rights and have to turn to their banks to make the decision in this regard.
On the other hand, one of the aspects that you must assess within this important corporate movement is that which has to do with the effect of its dilution. That is, the drop in price suffered by the shares of a company derived from a capital increase. Because initially do not doubt that the shares derived from a capital increase lose their value. Beyond that medium and long term They can be revalued and maybe even in a very satisfactory way for your personal interests. Especially when it comes to the so-called preferential subscription rights. Even more interesting to subscribe in a capital increase.
Classes of capital increase
Finally, it is time to learn about the types of capital increase that can be carried out. And that there are many as you will see below since it is not a completely homogeneous operation.
- At the by: it is when the price of the issue of the new shares coincides with the nominal value. In this case, there will be no choice but to go through the purchase of new shares and that is the passport to get to this part of the process.
- With cousin: its difference lies in the fact that the issue price is higher than the nominal price. And that is determined by the so-called issue premium.
- freed: it is equal to the nominal value, but the company uses part of its reserves that capitalizes them. If it is a fully paid capital increase, only the new shareholders will pay. While on the contrary, if it is a partially paid-up capital increase, the contribution of the share issue will be necessary.
In either case, there will be no other solution than to analyze each of the capital increases to show whether the operation is profitable or not. It will not be a simple analysis since it will require an accounting knowledge to decipher what you can achieve through this corporate event. You will even need the advice of a professional in your bank to provide you with the guidelines for action in the capital increase.