Watered Stock Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Watered Stock, written in plain English, along with examples of how it is used.

What is Watered Stock?

(n) When a joint stock company or corporation issues its stock for a consideration higher than the book value of such stock in the accounts of the establishment as on the date of transfer, such stock of shares are called watered stock. It is irrelevant of the market price of the stock

History and Definition of Watered Stock

Watered stock refers to the act of inflating the value of a company's stock beyond its actual worth by misleading investors through false or misleading information. This practice traces its roots to the 19th century when farmers and traders used to fatten their livestock ahead of market day to give the impression that they weighed more than their actual worth. Tricking investors into buying overpriced stock was a common practice in the early 20th century before the United States Securities and Exchange Commission introduced regulatory measures to prohibit the issuance of watered securities.

Examples of Watered Stock

  1. ABC Corporation was accused of fraudulently issuing watered stock to unsuspecting investors.
  2. Shareholders of XYZ Company are filing a lawsuit, alleging that the company's board issued watered stock to mislead investors.
  3. The SEC has taken legal action against a startup company for issuing watered stock to investors.
  4. The company went bankrupt when it was discovered that the firm's financial reports and balance sheet had been manipulated to hide the issuance of watered stock to the public.
  5. The Enron scandal is one of the most significant cases of watered stock in history that resulted in the company's eventual bankruptcy.

Legal Terms Similar to Watered Stock

  1. Overissuance: The issuance of more shares than a company is authorized to sell.

  2. Stock Dilution: The act of adding more shares to the pool of outstanding stock, resulting in a drop in earnings per share.

  3. Security Fraud: Deliberate misrepresentation or concealment of material information to deceive investors.