Watered stocks are artificially inflated assets that were once common but now rare due to changes in corporate laws. The term comes from a strategy used in the American Old West to temporarily bloat livestock with excess water to increase their weight and sales price. Investing in watered stocks is risky and investors should avoid deals where stocks or bonds appear to be worth more than the company’s current condition justifies.
Watered stocks are an example of a stock or other asset being promoted with a value that has been inflated by means outside of actual market performance. Drowned stocks were a common phenomenon in many trading environments around the world, but they rarely appear today. Much of the disappearance of watered-down stock as an equity investment is due to changes in the laws that corporations use to issue stock.
The approach derives its name from a strategy used with cattle in the American Old West during the 19th century. At that time, the pound weighed and sold cows and other forms of livestock. Essentially, the strategy employed forcing excess water into the animals, temporarily bloating the animal, and raising the weight. The higher rate resulted in a higher sales price, which directly benefited the seller. At the same time, the buyer would discover that the purchased stock heads would lose a lot of weight in a very short period of time. Since watered stocks involve a completely artificial process that temporarily inflates the total value of stocks, the name had become synonymous with financial movement by the early 20th century.
As in the days of the Wild West, watered stocks still put the risk directly with the investor. Watered stocks work along the lines of inflating claims about the company’s current value and profitability, in order to sell the stocks and bonds at a price that cannot be justified by the actual value of the company. In the event the corporation does not continue and creditors force the company into foreclosure, the owner of the vested shares could be subject to losing not only the amount of the capital contribution, but also be liable for the face value of the shares. issued shares of securities.
Equity investments, like a watered-down stock, often look great early on, especially since stocks are presented with far more return potential than they actually possess. However, the degree of risk associated with watered stocks is so great that investors are advised to avoid any deal in which the stocks or bonds in question appear to be worth more than the current condition of the company may justify. .
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