What is meant by watered stock?
Definition. Stock that is sold with a face value that is much greater then its actual (market) value. While watered stock may appear to be a good value, due to corporation laws, the stock holder may be exposed to liability up to the face value (rather then having their liability limited to the price paid).
What is watered stock and explain its symptoms?
Watered Stock refers to those company shares, issued at a price which is much higher than their intrinsic value, with an intent to dupe uninformed investors. In this way, the animals gained extra weight because of the consumed water and looked deceptively heavier, allowing the breeders to earn higher prices for them.
What is watered Capitalisation?
Watered Capitalization If the stock or capital of the company is not mentioned by assets of equivalent value, it is called as watered stock. In simple words, watered capital means that the realizable value of assets of the company is less than its book value.
What is watered capital How is it different from over Capitalisation?
– Watered capital is called so because the flow of money can be seen at the time of promotional events only and then money flows like water with the capital in the initial period at the time of promotion whereas Over capitalisation can be calculated after the company has worked for some years and at the end only.
What is watered stock give example?
For example, if an investor paid $5,000 for stock that was only worth $2,000, he could find himself on the hook for the $3,000 difference if the creditors foreclosed on corporate assets. Daniel Drew, cattle driver and financier, is credited with introducing the term watered stock to the finance world.
Can shares be watered down?
When a company issues additional shares of stock, it can reduce the value of existing investors’ shares and their proportional ownership of the company. This common problem is called dilution.
What are the types of watered capital?
Watered capital arises when a company pays higher price for the assets acquired from a going concern or when the promoters’ services are highly valued. For example, company purchases machinery from another company for Rs. 1 lakh, but its real value is Rs. 80,000 only.
What are the effects of over Capitalisation?
A. Over- capitalisation marked by low earning capacity destroys the reputation and goodwill of the company with deterrent effect on its prospects of business. (ii) Difficulty in raising additional funds: It causes decline in share values which brings down the credit- standing and financial reputation of the company.
What is the importance of capitalization in a company?
Capitalizing assets has many benefits. Because long-term assets are costly, expensing the cost over future periods reduces significant fluctuations in income, especially for small firms. Many lenders require companies to maintain a specific debt-to-equity ratio.
Why is it called watered stock?
This term is believed to have originated from ranchers who would make their cattle drink large amounts of water before taking them to market. The weight of the consumed water would make the cattle deceptively heavier, enabling the ranchers to fetch higher prices for them.
What leads to over capitalisation?
Overcapitalization occurs when a company has more debt than its assets are worth. A company that is overcapitalized may have to pay high interest and dividend payments that will eat up its profits. This may not be sustainable in the long term. Ultimately, a company that is overcapitalized may face bankruptcy.
What is the legal definition of watered stock?
Browse US Legal Forms’ largest database of 85k state and industry-specific legal forms. Watered stock is shares of stock of a corporation which have been issued at a price that greatly exceeds its true value. It is stock of a corporation whose total worth is less than its invested capital.
What happens when you sell your watered stock?
Those holding watered stock found it difficult to sell their shares, and if they could find buyers, the shares were sold at much lower prices than the original price.
How is watered stock used to defraud investors?
Watered stock is an illegal scheme to defraud investors by offering shares at deceptively high prices. Watered stock is issued at a higher value than it is actually worth; it is accomplished by overstating the firm’s book value.
Who is liable if watered stock is foreclosed on?
If creditors foreclosed on the company’s assets, the holders of watered stock could be held liable for the difference between the company’s value on the books and its value in terms of real property and assets.