Watered Stock

Watered stock refers to shares of a company that were issued at a much greater value than the value implied by a company's underlying assets, usually as part of a scheme to defraud investors. The last known case of watered stock issuance occurred decades ago, as stock issuance structures and regulations have evolved to put a stop to the practice. 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.

Key Points:

• Watered stock is an illegal scheme to defraud investors by offering shares at deceptively high prices.

• Watered stock is issued at a higher value than it is actually worth; it is accomplished by overstating the firm's book value.

• Once revealed for what it is, watered stock becomes difficult to sell, and if sold, is typically done so at a much lower price than originally obtained.

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