Finance
Fact-checked

At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.

Learn more...

What is a Watered Stock?

A watered stock represents shares that have been artificially inflated in value, often through deceptive practices, without any underlying increase in the company's assets or profits. It's like watering down milk; the quantity increases, but the value per share dilutes. Uncovering the true worth of these stocks requires a keen eye—what might you discover about their real value?
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum

Watered stock is an example of a stock or other asset that is promoted with a value that has been inflated by means that are outside the actual market performance. Watered stocks were once a common phenomenon in many trading environments around the world, but rarely appear today. Much of the disappearance of the watered stock as a capital investment is due to changes in the laws that corporations use to issue stocks.

The approach derives its name from a strategy used with livestock in the old American West during the 19th century. At the time, cows and other forms of livestock were weighed and sold by the pound. Essentially, the strategy employed forcing excess water into the animals, temporarily bloating the animal and raising the weight. The higher rate resulted in a larger sale price, which directly benefited the seller. At the same time, the buyer would find that the acquired heads of stock would lose a great deal of weight in a very short period of time. Since watered stock involves a completely artificial process that temporarily inflates the total worth of the stock, the name had become synonymous with the financial move by the beginning of the 20th century.

Watered stock is an example of an asset that is promoted with a value that has been inflated by means that are outside the actual market performance.
Watered stock is an example of an asset that is promoted with a value that has been inflated by means that are outside the actual market performance.

As in the days of the Old West, watered stock still places the risk squarely with the investor. Watered stock works along the lines of inflating the claims about the value and current profitability of the company, in order to sell the stocks and bonds at a price that cannot be justified by the real value of the corporation. In the event that the corporation did not continue and creditors forced the company into foreclosure, the holder of the watered stock could be subject to lose not only the amount of the capital contribution, but also be liable for the face value of the issued shares of stock.

Capital investments such as a watered stock often look very good at the onset, especially since the stocks are presented as having a great deal more potential for return than they really possess. However, the degree of risk associated with watered stock is so strong that an investor would be well advised to avoid any deal where the stocks or bonds in question appear to be represented as being worth more than the current condition of the company can justify.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

Learn more...
Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

Learn more...

You might also Like

Discussion Comments

myname

What are the determining features of watered stocks?

mdt

I'm not sure I understand the question. If you mean who is responsible or liable for the terms and conditions surrounding the issue of watered stock, then the corporation issuing the stock is liable for making sure the terms are within current application regulations and standards. If you are asking who incurs the tax liability, that would be the investor, who will pay taxes based on the actual value of the stock rather than the purchase price.

anon7000

who is liable for the issuance of watered stock?

Post your comments
Login:
Forgot password?
Register:
    • Watered stock is an example of an asset that is promoted with a value that has been inflated by means that are outside the actual market performance.
      By: naypong
      Watered stock is an example of an asset that is promoted with a value that has been inflated by means that are outside the actual market performance.