What are Watered Stocks?
Watered stocks are stocks issued by companies having less asset value compared to the value of stocks issued. Watered stock issuing was a common practice around the world in 18th and 19th centuries, but now because of the changes of laws regarding stock issue by corporations this is practiced rarely. Water stock trading involves high amount of risks and often results in huge losses.
Watered stocks derived its name from livestock market, where livestock owners feed large amounts of water to their cattle just before the marketing day. Like livestock, water stocks are overvalued to their actual asset and the stock holder is liable for not only losing the capital he invested, but also for face value shares of stocks issued. For example if the trader holds stocks of value $20,000 with a contribution of $10,000, in an event of foreclosure of the company by creditors, he may loss $10,000 he contributed and alos is personally liable to loss another $10,000.
Watered stocks are usually presented with high potential for return, and thus look attractive for traders, usually for inexperienced traders. But they are riskier, and it is always advised not to trade any type of stocks which are overvalued for their net company assets.
Watered stocks derived its name from livestock market, where livestock owners feed large amounts of water to their cattle just before the marketing day. Like livestock, water stocks are overvalued to their actual asset and the stock holder is liable for not only losing the capital he invested, but also for face value shares of stocks issued. For example if the trader holds stocks of value $20,000 with a contribution of $10,000, in an event of foreclosure of the company by creditors, he may loss $10,000 he contributed and alos is personally liable to loss another $10,000.
Watered stocks are usually presented with high potential for return, and thus look attractive for traders, usually for inexperienced traders. But they are riskier, and it is always advised not to trade any type of stocks which are overvalued for their net company assets.
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posted by Daniel Pipitone at
7:25 AM
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