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What is Prospectus

Triston Martin

Nov 09, 2023

The prospectus is a document that contains information about investment offerings to the public. This formal document is needed to be filed with (SEC) the Securities & Exchange Commission or the local regulator. The prospectus includes company information and history, its management profile, financial performance, risks, strategies, and other details that investors need to know. While issuing security for investment to the public, the company provides a prospectus including this wide range of information. Investors use the prospectus to evaluate the growth possibilities of the company to make informed investment decisions. In the United States, the legal name of public filing is S-1.

Prospectus for Stocks Issue

Companies that issue stocks for sale to the public must publish a prospectus with the SEC as part of the registration process. The prospectus contains complete information investors need to decide whether they'll take part in an investment/security offering or not. The company must provide a preliminary prospectus plus a final prospectus. However, the preliminary prospectus is the first offering legal document provided by the issuer, and it includes details about the business and the offered transaction. Besides, the preliminary prospectus does not include the price information or number of shares issued. In short, this prospectus is used to check interest in the market for proposed security.

On the other hand, a final prospectus is a document that is proposed when investment offerings are being finalized and issued to the people for the subscription. Unlike the preliminary prospectus, the final prospectus provides the public with complete offering details. Moreover, a final prospectus includes the offering price, shares issued, the company's financial information, dividend policy, types of securities, and further information. All this information assists investors in making sound decisions.

How to find and read Stock Prospectus?

Before you can read a company's stock prospectus, you should know how to find it. You can find it by visiting the Securities and Exchange Commission (SEC) website, which houses a database known as EDGR. However, there are multiple ways to search for the stock prospectus, such as by company name, security name, filing date, ticker symbol, and more.

The aim of the prospectus is to determine if an investment is suitable for your goals, risk, and existing investment portfolio. Well, there's no need to read every word in the prospectus to assess whether the investment in that new security is right for you. Instead, it would be best to read the prospectus with an eye for vital information.

The first and foremost thing to do while reading a prospectus is to understand the company's goals and business models if the company is issuing the stock prospectus. Once you have done it, it is best to consider the risk factors included in the prospectus. Make sure to check out if the prospectus is offering an investment that adjusts with your risk tolerance.

Furthermore, many prospectuses include details about the use of investment proceeds. You should check if they align with the company's model and if they will generate constant value. Once you're confident in understanding the stock prospectus, it is also worth checking to see if there is an overlap between the security in question and investments in your existing portfolio. It'll help you identify whether your portfolio will lose diversification value if you invest in that new security.

Components of Stock Prospectus

Here are the main components of a stock prospectus.

Overview of company

A prospectus gives the company's overview since its foundation. It details all events that occurred over all these years, like those events that helped the organization grow. In addition, the document provides information about founders, initial service offerings, and company registration. This part of the prospectus may also have a recap of the company's strategy and its USP. This component helps investors understand the company's historical success over the years.

Services/Products of the company

The prospectus lists the main economic activities launched by the company. Also, the company gives details about the products and services it provides to customers, plus anything else related to its processes.

Use of proceeds

The company will usually offer the issuance of securities when it's unable to grow capital to fund a large investment. For instance, the company wants to expand its functions to other locations, finance the production of new products, purchase big machinery, etc.

Management profile

A stock prospectus contains important information about the organization's administrative management. It lists the education qualification and experience of the company's management team that makes the team a right fit for the organization. Also, investors want to guarantee that the company's management team has what it requires to protect their investments.

Number of securities offered

Another important section in the prospectus is a statement on the total securities being issued to the public and their price. Additionally, it needs to outline the expected return rate on investors' funds. This part of the prospectus also tells details about the subscription span when investors can buy the securities.

Financial information of the company

The stock prospectus also provides information on the previous financial performance of the company. The information includes stock performance, EBIT, net profit, and more. The investment security performance could be compared with Dow Jones Industrial Average or S&P 500.

Risks involved

A prospectus must reveal the risks investors may meet when purchasing securities. These risks include currency risks when buying international mutual funds, government regulations, capital restrictions, or separate investors owning many stocks. The disclosure of risks protects the organization from allegations that it doesn't show crucial data that become the reason for the investor's loss.

The Bottom Line

A prospectus is a crucial document for potential investors as it provides them with all details of the investment offering. This formal document is filed with the SEC. Investors use the stock prospectus to get information about the company (issuer) and its stock, just like an employer evaluates a candidate's efficiency for a job using a resume. A prospectus helps investors understand risks that can come up with purchasing security.

Moreover, the prospectus includes the company's financial history, risk, security amount and value, number of shares, information about the management team, and use of investment proceeds. A final prospectus is comprehensive and thorough. With it, investors have more information to make investment decisions.

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