Watered stock refers to shares issued by a corporation in exchange for assets that undercompensate for the stock’s value. This issue was prominent in the early 20th century when investors relied on the par value of stocks, which ensured a minimum company value. Stocks with a par value had to be sold at least at that value, but individuals often traded businesses or assets for stock without matching the par value, resulting in a corporation’s actual value being less than investors expected. When stocks became “watered” through these exchanges, those involved could be held liable for the difference between the par value and the actual asset value, and potentially face other charges. Today, watered stock is rare because most stocks have a minuscule par value or none at all, disconnecting a stock’s value from a fixed par value.
[Last updated in July of 2024 by the Wex Definitions Team]