What is a Watered Stock?

A share of a company that is issued at a value higher than the book value of the assets of the issuing company or higher than underlying assets is a watered stock. Shares of this nature are issued by companies as a way of tricking and cheating investors. Watered stock are known as securities fraud. In previous times, watered stocks are offered defraud investors and there have been diverse attempts to hedge the dubious scheme. Fortunately, the practice of watered stock has ceased due to many regulations and rules by oversight boards.

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How Does a Watered Stock Work?

When a stock or share is issued at an inflated value, often above the value of its underlying assets, it is a watered stock. There are many factors responsible for the issuance of watered stocks, some are the artificial inflation of the value of a stock, an unrestrained issuance of a company's stock and inflation in book values of the stocks. However, it is important to know that an issuing company can deliberately inflate the value of a stock being issued just to defraud its investors. In olden days, many companies use watered stocks as a dubious approach to swindle investors. Investors incur losses while companies accrue profits when watered stocks are issued. There are many structures and regulations that have been put in place to guard the way companies issue stock. With the involvement of the regulations, issuing companies are mandated to issue shares below the par value or no par value. However, there is no assurance that a stocks par value is the actual value, there are other measures to distinguish between the actual value of shares and their low or no par value.