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Simple English definitions for legal terms
watered stock
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A quick definition of watered stock:
Watered stock is when a company gives someone stock in exchange for something that is worth less than the stock. This used to be a big problem because investors relied on the value of the stock, but sometimes the company's actual value was less than what the stock was worth. This doesn't happen as much anymore because most stocks don't have a set value.
A more thorough explanation:
Definition: Watered stock refers to stocks that are issued by a company in exchange for assets that are worth less than the value of the stock. This practice was more common in the early 20th century when investors relied on the par value of stocks to determine their worth.
For example, if a company issued 100 shares of stock with a par value of $10 per share, the total par value of the stock would be $1,000. If the company then traded assets worth only $500 for those 100 shares of stock, the stock would be considered "watered" because the assets received were worth less than the par value of the stock.
When stocks were "watered" in this way, investors could be misled into thinking that the company was worth more than it actually was. This could lead to financial losses for investors if the company's true value was revealed.
Today, watered stock is less common because most stocks have a very low par value or none at all. This means that the value of a stock is not tied to its par value.