what is watered stock 
watered stock referred to shares of a company that were issued at a much greater value than the value implied by a company s underlying assets usually as part of a scheme to defraud investors the last known case of watered stock issuance occurred decades ago as stock issuance structure and regulations have evolved to put a stop to the practice this term is believed to have originated from ranchers who would make their cattle drink large amounts of water before taking them to market the weight of the consumed water would make the cattle deceptively heavier enabling the ranchers to fetch higher prices for them understanding watered stockthe book value of assets can be overvalued for several reasons including inflated accounting values like a one time artificial increase in inventory or property value or excessive issuance of stock through a stock dividend or employee stock option program perhaps not in every single case but often in the late 19th century owners of a corporation would make exaggerated claims about a company s profitability or assets and knowingly sell shares in their companies at a par value that far exceeded the book value of the underlying assets leaving investors with a loss and the fraudulent owners with a gain they would do this by contributing property to the company in return for the stock of inflated par value this would cause the value of the company to increase on the balance sheet even though in reality the company would hold far fewer assets than those reported it would not be until much later that investors learned that they were deceived those holding watered stock found it difficult to sell their shares and if they could find buyers the shares were sold at much lower prices than the original price if creditors foreclosed on the company s assets the holders of watered stock could be held liable for the difference between the company s value on the books and its value in terms of real property and assets for example if an investor paid 5 000 for stock that was only worth 2 000 he could find himself on the hook for the 3 000 difference if the creditors foreclosed on corporate assets daniel drew cattle driver and financier is credited with introducing the term watered stock to the finance world the end of watered stockthis practice essentially came to an end when companies were compelled to issue shares at low or no par value usually under the advice of attorneys who were mindful of the potential for watered stock to create liability for investors investors became wary of the promise that par value of a stock represented the actual value of the stock accounting guidelines developed so that the difference between the value of assets and low or no par value would be accounted for as capital surplus or additional paid in capital in 1912 new york allowed corporations to legally issue no par value stock and split the incoming capital between capital surplus and stated capital on accounting ledgers with other states following suit shortly thereafter 