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I have been wondering do water candles work if you place them on the floor or on the table, or if they only work if it is in your hand.

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According to Terraria's official wiki page on Water Candles:

Holding a Water Candle in your hand will increase the monster spawn probability to 133% and the maximum number of monsters to 150%.

They produce light like a regular torch or candle would. If you have them on tables as props, they produce some lovely spooky lighting. However, they don't increase the spawn rate like this.

To increase the spawn rate with a water candle, hold it in your hand. It can't just be in the top row of your inventory - it must be the currently active and held item.

Keep a weapon handy so that you can swap back and forth between your water candle and weapon as necessary. You can't hold both at the same time, but you can at least run around luring enemies out with your water candle, attack them all, then return to luring enemies out.

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So does holding Water Candle in top row of invetory increase spawn rate? Or do I need hold it in my hand? –  George Gaál Aug 6 '11 at 14:40
    
@George The wording used by the wiki is "Holding a Water Candle in your hand". I don't think the top row of inventory slots will cut it. –  Jonathan Hobbs Aug 6 '11 at 15:20
    
OK. This is disappointing. So there are two options: hold Water Candle or defend yourself with weapons. –  George Gaál Aug 6 '11 at 15:30
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@George: Yes, but that's not bad. Hold your water candle to make monsters spawn, then when they're in attack range, equip your weapon and attack them. The Water Candle is also good for making the King Slime come out. –  Jonathan Hobbs Aug 7 '11 at 1:19
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You can also do what I like to do with all the useless water candles you find: Give your arena some spooky low-lighting. –  Zibbobz Oct 16 '13 at 13:01

According to the disassembled code (1.2.0.3.1), placed water candles also affect spawnrate and max spawns. This effect is separate from holding the candle in your hand and will stack with it. A single placed water candle is enough and only one matters.

NPC.spawnRate = (int)((double)NPC.spawnRate * 0.75); // Spawns happen 33% more often, spawn interval multiplied by 0.75
NPC.maxSpawns = (int)((float)NPC.maxSpawns * 1.5f); // Spawn limit increased by 50%, multiplied by 1.5

Both effects are the same and when stacked (holding a candle and placed a candle) spawnrate is increased by 78% and maximum spawned enemies is increased by 125%.

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So THAT'S why so many skeletons are wandering around in the dungeon! Is this a recent change, or has it always been like this and no one ever noticed? Also will it stack with a Battle Potion? –  Zibbobz Oct 25 '13 at 13:18
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@Zibbobz It will stack with any other spawnrate effects and the water candle placement was added in 1.2. Also note that different biomes have their own spawnrate multipliers. The underground biomes are usually boosted a little. –  3ventic Oct 25 '13 at 13:26

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