What is Watered Stock?

Watered stock is shares in a corporation that are sold at a price higher than the value of the underlying assets. This situation can arise when the assets are grossly overvalued, usually through a manipulative scheme. For example, a stock promoter makes exaggerated claims about the future prospects of a company, convincing investors to buy up shares at an inflated price. This is a common tactic with penny stock pump and dump schemes. The seller of the shares then pockets the proceeds and leaves investors with valueless stock. The regulatory filings now imposed by the Securities and Exchange Commission make it much more difficult to engage in a watered stock scheme today.

The term comes from cattle ranching, where ranchers forced cattle to drink an excessive amount of water in order to sell them immediately thereafter at a weight-based price.