Understanding Watered Stock: History, Definition & Fraud

A watered stock is a resource with an extreme, over exaggeration, of the actual stock value. The term originated with cattle ranchers who would feed their cattle an excessive amount of water to make the cows weigh more. This in essence would secure a larger price for the cattle at the market. A financier name Daniel Drew is credited with introducing this method to the financial market in the 1800's.

Today this practice is considered a form of fraud because the buyer made a decision to invest based on a misrepresentation of the value. The recent crisis in the mortgage industry is a great example of watered stock because property values were inflated.  Once the bubble burst many homeowners realized the homes they thought were worth several hundreds of dollars were worth a lot less. Although the home values have decreased significantly, the borrowers are still responsible for the large mortgages they have received prior to the crisis and they are no longer able to get out from under it because the values have significantly decreased. This prevents them from refinancing or selling. Several laws have recently been enacted to protect consumers and investors against securities fraud.