In recent years, a kind of new seal stone called “Laowo Stone” from Laos has entered the Chinese seal stone market and it has great impact on the market. However the coloration mechanism is unclear. In order to study the coloration mechanism of “Laowo Stone”, red samples were investigated with VIS DRS techniques together with XRD, FTIR and EDXRF. It was found that: the main mineral composition of “Laowo Stone” is dickite, together with small amounts of kaolinite. EDXRF data show that the concentration of the red color has a good relationship with Fe element; the spot with deeper color has higher Fe content. Fe occurs as iron mineral distributed in the dickite particles. The grain size of the muddy iron minerals is extremely small and the content is low, regular micro area study cannot identify the iron mineral. Then we study the samples with diffuse reflectance spectroscopy (DRS) which is sensitive to iron minerals. The derivative curves of DRS are potentially useful for quantitatively determining hematite and goethite concentration in soils. The main mineral composition of “Laowo Stone” is clay mineral, which is the same as soils. So DRS is used to identify the iron minerals. The first order derivative spectrum has the 565~570 nm peak and the iron mineral was identified to be hematite. Our results confirmed that the red coloration of “Laowo Stone” is caused by tiny hematite crystals distributed within the grain boundaries of dickite particles.