The story is usually true, or at least partly true, but so outrageous as to be incredible to the average listener, so it is told as a "Story".  The sophisticated listener will be able to parse the real events from any fictional elaboration which has been innocently added to increase the emotional or romantic impact of the tale.

Navyman and mariners tell these stories to each other for their own amusement or edification.  They are also sometimes told to civilians for their shock effect, although some civilians, such as drunken fraternity rats, are difficult to shock.  Veterans are, of course, never civilians.

Sometimes mistakes are made and a sea story is told to a Police Officer in the performance of his duty.  If the storyteller is fortunate, the Officer is a Veteran who recognizes the benign and humorous intent of the story. If, however, the Officer is a college boy, the storyteller may have to attempt a different strategy, such as telling the truth.

Sea Stories are usually never told to children, ladies or somebody's mother.  In these modern times however it has become difficult to follow this general rule.  Calling a woman a lady may get you punched in the nose, and somebody's mother may be a Marine Gunnery Sergeant with two sons on the Seawolf.

Sea Stories are not to be confused with Fairy Tales or Fables.  Fairy tales generally begin with "Once Upon A Time", while the Sea Story begins with "This is no shit!".  Fables generally have a moral message or some moral content, while the Sea Story, although not necessarily immoral, is probably at a minimum amoral.

The silly entry for "Sea Story" in Wikipedia, generally an excellent reference, completely misses the point and was probably written by some college English Lit. Professor.