The Difference Between Paid and Unpaid Stock at a Glance What Existing Shareholders Need to Know

confused about the difference between a paid and non-paid capital increase? we've made it easy for you to understand the difference between a paid and a non-paid capital increase, including the stock price impact and a pre-investment checklist.

what is a capital increase?

when investing in stocks, you'll often come across the word capitalization, which literally means to increase capitalization. It's when a company issues new shares to expand its business or improve its financial position.

why do companies raise capital? there are two main reasons: liquidity, to raise money for new business investments or to pay down debt, and financial stability, to increase capital to make the company more stable.

there are two types of capital increases: paid and non-paid. Both involve issuing new shares, but they differ in whether or not money is raised.

what is a paid capital increase

a paid capital increase is when a company issues new shares and receives money from investors in return. This is when actual money comes into the company from the outside.

there are three different types, depending on who can buy the new shares.

a rights issue gives existing shareholders the right to buy new shares first, which they can do by exercising their warrants to buy shares themselves, or they can sell their warrants to someone else in a rights sale.

a general public offering is open to all investors, not just existing shareholders. It's a publicly solicited offering.

a third-party allotment is when new shares are allocated to a third party, such as a specific institution or company. It's often used to attract strategic investors or to secure a management buyout.

what is a free issue

a free share capitalization is when a company adds surplus to its capital stock and gives away new shares to existing shareholders for free. No new money comes into the company.

there are two sources of capitalization: retained earnings from operating activities, or capital surplus, which is the difference between the price of a share and its par value.

a free stock offering increases the number of shares outstanding and adjusts the price per share, but it doesn't change the overall value of the company, just like dividing a pizza from 8 to 16 slices doesn't increase the amount of pizza.

paid vs. non-paid equity

to summarize the key difference between a paid and a free stock offering.

a paid capital increase involves an influx of external funds, which means that the company actually gets cash. A free share issue utilizes internal resources, which means that no money moves, just accounts on the books.

the shares can be allocated to existing shareholders, general investors, or third parties, while the free shares are only given to existing shareholders in proportion to their shareholding.

the effect on existing shareholders is also different: in a rights issue, if existing shareholders don't participate in the subscription, there is dilution, which lowers their shareholding. In a free issue, there is no dilution because all shares are allocated to all shareholders in the same proportion.

stock price impact

the stock price impact of a capital increase is complex: in the short term, the stock price often decreases due to the burden of new shares and the exercise of warrants, but if the purpose of the capital increase is positive, it can be a long-term driver of the stock price.

it's natural for the stock price to adjust after the rights issue. The reason for the stock price decline is an automatic adjustment due to the increase in the number of shares, not a loss of corporate value.

on the contrary, it can be a positive sign that the company has enough surplus, and it can also encourage trading as the stock price becomes less expensive.

a checklist to follow before investing

when a company announces a capital increase, there are three things to look for. knowing how to read the disclosure will help you make an informed investment decision.

first, find out why the company is raising money now. whether it's an investment for growth or a desperate need to raise money can mean completely different things.

second, check the financial structure. if a company with a high debt-to-equity ratio is raising capital, it could be a negative sign.

third, look at the size of the new shares. the larger the ratio of new shares to the number of outstanding shares, the more pressure on existing shareholders.

by checking the boxes for shareholders in advance, you can mitigate the risk.

FAQs

which is more beneficial for shareholders, a paid or a free share issue?

in general, a free issue is more favorable for existing shareholders because they receive shares at no additional cost and maintain their shareholding, but it depends on your company's situation and the purpose of the issue.

do I have to exercise warrants in a capital increase?

no. You don't have to exercise your warrants, but you can sell them to other investors through a warrant sale. However, if you don't exercise your warrants, your shareholding will be diluted.

will I lose money if the stock price drops after the free share issue?

not necessarily. Even if the share price adjusts due to the rights offering, the overall value of the asset remains the same because you own more shares. After a short-term correction, the share price often recovers due to increased trading volume.

where can I find the capital increase announcement?

you can find it on the Financial Supervisory Service's electronic disclosure system by searching for paid capital increase announcement or free capital increase announcement.

wrapping up

the key difference between a paid and free share issue is whether or not outside capital is being raised and the percentage of existing shareholders. Make it a habit to check the purpose, financial structure, and number of new shares before investing.

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