Next video:
Loading the player...

The Security and Exchange Commission (SEC) requires that any company raising money from potential investors through the sale of securities must file a prospectus with the SEC and then provide the prospectus to potential investors. 

The prospectus informs investors of the company’s history, management biographies, financial statements, best and worst-case scenarios of company performance and any other information that will help investors make an informed decision about the investment.

A prospectus for stocks and bonds is issued in two stages.  The first stage is the preliminary prospectus that contains most of the details of the business and proposed financial transaction.  It is nicknamed “red herring” due to the red lettering on the front cover. The preliminary prospectus is used to shop the deal to see if there is enough interest from investors to move forward. Assuming the deal progresses, then a second stage of prospectus is issued -- the final prospectus.  It incorporates all the information from the preliminary prospectus, plus the final security amount and price.

Mutual funds must also issue a prospectus, because a mutual fund continually offers shares to the public.  A mutual fund’s prospectus contains details about the fund objectives, investment strategy, fund history, distribution policy and biographies of the fund managers.

Established publicly traded companies that meet stringent SEC requirements are allowed to offer securities using an abbreviated prospectus that references all the company’s past public filing information.  Investors can then also search the already available public information on the company. 

Related Articles
  1. Investing

    An Insight on the Prospectus of Corporate Bonds

    Making a well-informed decision with respect to buying a corporate bond involves reading the significant facts and details of the prospectus document.
  2. Investing

    Mutual Funds: Management Fees Vs. MER

    Having a clear understanding of the fees charged by a mutual fund is a significant component to making an informed investment decision. Often the management fee is used interchangeably with the ...
  3. Investing

    Data Mining For Investors

    Being an informed investor is extremely important, but where and how do you get the data for your research?
  4. Investing

    Is Your Mutual Fund Safe?

    You might be carrying more risk than you think if your fund invests in derivatives.
  5. Investing

    Mutual Fund Fact Sheets: What You Need to Know

    Novice or experienced investors should read mutual fund sheets. Fees and explanations will be discussed providing valuable information to the investor.
  6. Investing

    Understanding The Top SEC filing forms

    It's easier than ever to keep track of your SEC filing status online.
  7. Investing

    How To Start A Hedge Fund In Canada

    Would-be hedge fund managers in Canada need to understand the laws and regulations that must be followed in order to start a fund in the country.
  8. Investing

    Selling Mutual Funds: What Happens When You Liquidate?

    Learn about the hidden costs that can be triggered when you redeem mutual fund shares. Even no-load funds have fees and expenses you may not know about.
Hot Definitions
  1. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  4. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  5. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
Trading Center