Watered stock refers to any stock issued by a corporation to someone in exchange for assets that under-compensate for the stock. The issue was a larger problem in the early 20th century when investors depended on the par value of stocks which ensured companies had at least a certain amount of value. Stocks with a par value legally must be sold at minimum for the par. However, many individuals successfully traded businesses and other assets to a corporation for stock with the assets not equaling the par value, and this meant the corporation’s actual value was less than the par value investors depended on. When stocks became ‘watered’ through these exchanges, the individuals involved could be held liable for the difference between the par value and the assets and potentially other charges. Today, watered stock rarely occurs at least through the normal means because most stocks have a miniscule par value or none at all, meaning that a stock’s value does not really relate to a par value.
[Last updated in April of 2022 by the Wex Definitions Team]