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Watered Stock – Definition

Watered Stock Definition

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 practise of watered stock has ceased due to many regulations and rules by oversight boards.

A Little More on What is Watered Stock

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 stock’s par value is the actual value, there are other measures to distinguish between the actual value of shares and their low mor no par value.

References for “Watered Stock

Academic research for “Watered Stock

Watered Stock Commissions Blue Sky Laws Stock without Par Value, Cook, W. W. (1920). Watered Stock Commissions Blue Sky Laws Stock without Par Value. Mich. L. Rev., 19, 583.

Shareholders’ Defenses Against Liability to Creditors on Watered Stock, Bonbright, J. C. (1925). Shareholders’ Defenses Against Liability to Creditors on Watered Stock. Colum. L. Rev., 25, 408.

Watered Stock and Blue Sky Legislation, Richards, H. S. (1922). Watered Stock and Blue Sky Legislation.

Watered Stock-Shareholder’s Liability to Creditors in Arizona, McRae III, H. E. (1966). Watered Stock-Shareholder’s Liability to Creditors in Arizona. Ariz. L. Rev., 8, 327.

Creditors’ Remedies Against Holders of Watered Stock, Singletary, J. N. (1951). Creditors’ Remedies Against Holders of Watered Stock. La. L. Rev., 12, 309.

Stockholders’ Liability upon Unpaid and Watered Stock Subscriptions, Switzer, E. H. (1955). Stockholders’ Liability upon Unpaid and Watered Stock Subscriptions. Tenn. L. Rev., 24, 584.

Rights of Corporate Creditors upon Unpaid and Watered Stock Subscriptions, Abernethy, J. S. (1941). Rights of Corporate Creditors upon Unpaid and Watered Stock Subscriptions. Wash. L. Rev. & St. BJ, 16, 238.

Shareholders’ Liability on Unpaid Subscriptions and Watered Stock of Utah Corporations, Redd, D. W. (1949). Shareholders’ Liability on Unpaid Subscriptions and Watered Stock of Utah Corporations. Utah L. Rev., 1, 62.

Watered stock and control of telegraph rates: Early proposals for regulating a public utility, Lindley, L. G. (1972). Watered stock and control of telegraph rates: Early proposals for regulating a public utility. The Journal of Economic History, 32(1), 403-408.

Dividends on watered stock, Johnson, J. F. (1907). Dividends on watered stock. Journal of Accountancy (pre-1986), 4(000001), 47.

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