It will also show up many forms of damage such as creases and thin spots. Practice first with stamps where you can see a watermark with a bright light and then try harder ones. Make sure that the stamp might have a watermark by looking it up in a catalog. This way you don't waste fluid. Always do watermarking with adequate ventilation.
Lighter fluid contains naptha which is very flammable.
In addition, naptha is a solvent and all solvents are to some extent toxic if you breathe enough of them. The key to safe use is ventilation and using the minimal amount of watermark fluid possible. On some stamps it's harder to find the watermarks than on others. The newer issues of the British Commonwealth are sometimes impossible to find in a tray with solvent. In some of these cases, the expensive electronic watermark detectors are of help.