A' Watch-stone' was apparently a stone, carved in the shape of a Drúadan, set with some sort of 'power' to 'watch' over whomever it belonged to.

Aghan gave one to his friend Barach to watch over his home during the Orc-raids in the Forest of Brethil. When and band of Orcs came and set fire to Barach's home, the Watch-stone seemed to 'come to life' and a mysterious Drûg appeared and stomped out the flames, saving Barach's house.

What sort of power these 'Watch-stones' contained, or how the Drúedain used it, is not really known, but it would appear that when a Drûg put his power into the stone, what happened to that stone, effected him as well.

When Aghan returned to see Barach again, the Watch-stone was broken and burned, and it appeared that Aghan had suffered some wounds as well.
Encyclopedia entry originally written by Nienna-of-the-Valar