What are 'Watered Stock'

Watered stock are shares of a company that are issued at a much greater value than its underlying assets, usually as part of a scheme to defraud investors. This term is believed to have originated from ranchers who would make their cattle drink large amounts of water before taking them to market. The weight of the consumed water would make the cattle deceptively heavier, enabling the ranchers to fetch higher prices for them. The last known case of watered stock issuance occurred decades ago, as stock issuance structure and regulations have evolved to put a stop to the practice.

BREAKING DOWN 'Watered Stock'

The book value of assets can be overvalued for several reasons, including inflated accounting values — like a one-time artificial increase in inventory or property value — or excessive issuance of stock through, for example, a stock dividend or employee stock-option program. Perhaps not in every single case, owners of a corporation would knowingly sell shares in their companies at a par value that far exceeded the book value of the underlying assets, leaving investors with a loss and the fraudulent owners with a gain. It would not be until much later that investors learned that they were deceived. Those holding watered stock found it difficult to sell their shares and if they could find buyers, the shares were sold at much lower prices than the original price.

This practice essentially came to an end when companies were compelled to issue shares at low or no par value. Investors became wary of the promise that par value of stock represented the actual value of stock. Accounting guidelines developed so that the difference between the value of assets and low or no par value would be accounted for as capital surplus or additional paid-in capital.

RELATED TERMS
  1. Above Water

    Above water refers to the ending value of an assets being above ...
  2. Produced Water

    Produced water is waste water generated during the production ...
  3. Share Capital

    Share capital refers to funds raised by issuing shares in return ...
  4. Water Rights

    Water rights pertain to the legal rights of property owners to ...
  5. Face Value

    Face value is the nominal value or dollar value of a security ...
  6. Pull To Par

    Pull to par is the movement of a bond's price toward its face ...
Related Articles
  1. Investing

    Risks to Consider When Investing in Water

    Investing in water should be a lock. But water is volatile and could see as many risks as potential rewards.
  2. Investing

    Should Water Be Privatized?

    Could water privatization mean lower costs, greater efficiency and higher quality compared to public sector providers? A look at the evidence so far.
  3. Investing

    With Fracking It’s All About Water Management

    It takes an awfully large amount of water to frack an oil and gas well these days. Given the growth projections for production activity in the U.S. and Canada, water management could be one of ...
  4. Investing

    Book Value: How Reliable Is It For Investors?

    In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
  5. Investing

    Beverage Giants Blur Line Between Water and Soda

    With bottled water America's No. 1 beverage, firms are looking to more profitable variations.
  6. Investing

    CFWAX: Introducing Calvert Investment's Global Water Fund

    Discover how the Calvert Global Water Fund Class A shares are outperforming the markets in 2016 and learn which stocks may be the right fit for your portfolio.
  7. Investing

    What Is The Value In Value Investing?

    Value investing has its advantages, but it also has significant drawbacks. We look at the pros and cons.
  8. Investing

    Balance Sheet: Analyzing Owners' Equity

    Analyzing owners’ equity is an important analytics tool, but it should be done in the context of other tools such as analyzing the assets and liabilities on the balance sheet.
RELATED FAQS
  1. How Are Book Value and Intrinsic Value Different?

    Book value and intrinsic value are two ways to measure the value of a company. Find out which is known as the true value ... Read Answer >>
  2. What is 'marginalism' in microeconomics, and why is it important?

    Find out why marginalism is such an important concept in microeconomic theory, and what economists mean by marginal utility ... Read Answer >>
  3. What are the components of shareholder equity?

    Understanding company valuation figures, such as shareholder equity, is crucial in assessing a business. Read Answer >>
  4. How does a share premium account appear on a balance sheet?

    Learn where a share premium account shows up on a balance sheet and for what purposes funds in a share premium account may ... Read Answer >>
  5. What is the difference between carrying value and market value?

    Understand the difference between carrying value and market value. Learn when a company uses carrying value to value an asset ... Read Answer >>
Trading Center