Stock representing ownership of overvalued assets whose total worth is less than their invested capital. The condition of overcapitalized corporations may result from inflated accounting values, operating losses or excessive dividends. Some negative characteristics of watered stock are the inability to recoup full investment in liquidation, insufficient return on investment, low market value and the firm's reduced ability to capitalize on growth opportunities. The customary method of correcting the situation is for a corporation to either increase its assets without increasing its outstanding shares or reduce outstanding shares without reducing assets. Other methods do exist. See: Dividends; Issued And Outstanding; Liquidation; Overvalued; Par
Watered stock is an asset with an artificially-inflated value. The term is most commonly used to refer to a form of securities fraud common under older corporate laws that placed a heavy emphasis upon the par value of stock.