Posted in Finance, Accounting and Economics Terms, Total Reads: 545
Definition: Watered Stock
Watered stock is a term used for stocks that are issued at much inflated prices compared to the book value of the issuer’s assets. The term is used most commonly to refer to securities fraud where the company sanctioned such stocks with the full knowledge of the facts related to the assets of the company. Such stocks may also be result of large operating losses, overvalued assets or excessive dividends paying stock.
Watered stock derived its name from the cattle’s man practice of increasing the size or weight of the livestock by forcing it to drink a lot of water, thus earning higher/inflated prices for the livestock. Technically, watered stocks exist if:
Stock Prices * Shares outstanding > Net Assets of the issuing firm