Watered stock, under trading and over trading

Watered Stock

Watered stock is an illegal practice where a company issues shares at a value that is much higher than the actual value of the company's assets. It is a way to fraudulently inflate the value of the company. It typically happens by overstating the book value of the company.

Origin of the Term: The term "watered stock" is believed to have come from ranchers who would make their cattle drink large amounts of water before taking them to market. The weight of the consumed water would deceptively make the cattle appear heavier.

Key Characteristics:

• Fraudulent Scheme: It's a deliberate attempt to deceive investors.
• Inflated Value: Shares are issued at a price higher than their true worth.
• Overstated Book Value: The company inflates its asset value on paper to justify the inflated share price.

Consequences: Once revealed, watered stock becomes difficult to sell and is often sold at much lower prices than the initial price.