Watered Stock

If the issued value of a stock is much greater than the value of the issuing company’s assets, then it is referred as watered stock. This term mainly originated from the ranchers who would feed their cattle large amounts of water to increase the weight of the livestock before they were put up for sale. Daniel Drew, a cattle driver turned financer introduced the term to the New York financial district. Excessive stock dividends, overvalued assets or large operating losses can be the main causes of watered stock. There can be many possible reasons for overvalued assets such as inflated accounting values or even excessive issue of stock. In the late 1800’s, American stock promoters would inflate their claims about a company’s assets or profits and sell stocks and bonds at a value much higher than the actual value of the company. The holders of watered stock were personally liable if creditors foreclosed the assets of the corporation.

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Edited and Updated 31st May 2014

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