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Watered stock is an artificially inflated asset that was once common but now rare due to changes in laws. It gets its name from a strategy used with cattle in the American Old West. Watered-down stocks pose a risk to investors as they inflate claims about a company’s value and profitability. Investors should avoid deals where the stock or bond appears to be worth more than the company’s current condition can justify.
Watered stock is an example of a stock or other promoted asset with a value that has been inflated by means that are outside of actual market performance. Watered-down stocks were once a common phenomenon in many trading environments around the world, but they rarely appear today. Much of the demise of watered stock as a capital investment is due to changes in the laws that companies use to issue stock.
The approach gets its name from a strategy used with cattle in the American Old West during the 19th century. At the time, cows and other forms of livestock were weighed and sold by the pound. In essence, the strategy employed by forcing excess water into the animals, temporarily inflating the animal and gaining weight. The higher rate resulted in a higher selling price, which directly benefited the seller. At the same time, the buyer will find that the acquired stock items would lose a lot of weight in a very short period of time. Because irrigated stock involves an entirely artificial process that temporarily inflates the total value of the stock, the name had become synonymous with financial movement by the early 20th century.
As in the days of the Old West, watered down stocks still pose the risk directly with the investor. Watered-down stock works along the lines of inflating claims about the company’s current value and profitability, in order to sell the stock and bonds at a price that can’t be justified by the company’s true value. In the event the company does not continue and creditors force the company into foreclosure, the holder of the watered down shares could be liable to lose not only the amount of the capital injection, but also be liable for the par value of the issued shares of stock.
Capital investments such as a watered-down stock often look very good at first, especially since the stock is presented as having much greater potential for return than it actually possesses. However, the degree of risk associated with watered-down stocks is so great that an investor would do well to avoid any deal in which the stock or bond in question appears to be represented as worth in excess of what the company’s current condition can justify.
Smart Asset.
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