A prospectus is like a detailed product description of an investment. The Securities and Exchange Commission (SEC) requires one be filed for each investment made available to the public, including stocks, bonds, mutual funds and exchange-traded funds. And it’s a must-read for any investment you’re considering adding to your portfolio.
What’s the purpose of a prospectus?
Investors can learn pretty much everything about a potential investment by checking out its prospectus. In fact, that’s exactly why the SEC requires the legal document—to help prospective investors make an informed decision about whether the investment might fit well into an investor’s personal investing strategies.
What information can I find in a prospectus?
Probably more than you’d ever want to know. The exact details depend on the type of prospectus you’re looking at. Before an investment goes public, the issuer puts out a preliminary prospectus, in part to test the waters and see how much public interest there is. It should contain information about the issuing company as well as its underwriters (including its background, business plan, organizational structure, past financial information, projected financial information, and potential risks for the company and investment).
The final prospectus should be pretty similar, but updated to include more recent information and any necessary corrections. Plus, it should have the number of shares or certificates to be issued, along with the offering price. (Hint: That’s the per-share value assigned for an IPO, which the underwriters, the financial institutions that help a company go public, help determine.) And for bonds, it also notes the yield, maturity date, how interest is to be paid, and what the company plans to do with the money raised.
A mutual fund prospectus is a little different. For example, instead of a business plan, it includes the fund’s objectives and strategies, and instead of organizational structure, it has fund management details. It also lays out all of the investing costs you can expect to face, including the fund’s expense ratio (the amount a company charges investors to manage a fund) and any additional fees (like for buying or selling shares), as well as the fund’s distribution policy.
Whatever the type, a prospectus can be many, many, many pages long and tends to include tons of jargon that can make it challenging for a regular investor to follow.
Is there a Cliff’s Notes version of a prospectus?
Actually, yes. Mutual funds are required to provide what’s called a summary prospectus that hits on all the most important points covered by the full prospectus and nothing else. It must include, in this order:
- the fund’s investment objectives/goals
- fee and expense tables
- portfolio turnover (i.e. how often the fund buys and sells investments in its portfolio)
- principal investment strategies
- principal risks
- past performance
- names and tenures of fund managers
- policy for buying and selling shares
- tax information
- financial intermediary (i.e. broker) information
You definitely want to zero in on fees and expenses. Focusing on these details should help tell you whether it’s a viable investment, in general, and if it’s a good fit for your portfolio specifically.
Okay. Where can I find an investment’s prospectus?
It should be available on the company’s website, perhaps in the “investor relations” or some similarly labeled section.
You can also check EDGAR, the SEC’s Electronic Data Gathering, Analysis and Retrieval system. This U.S. database holds all of each company’s official filings, including its prospectus, as well as annual reports (form 10-Ks), quarterly reports (10-Qs), proxy statements (DEF-14A) and much more.
Does the prospectus include all I need to know about an investment?
Not quite. What a prospectus can’t tell you is the recent news about the investment itself or factors that may impact it (like unfolding trade agreements, political dramas, oil prices and other macroeconomic considerations). So it’d behoove you to also scan the company’s other financial filings, especially the most recent quarterly earnings reports, as well as the news in general to get all the most up-to-date information.
Just note that while you do want to know the big picture about a company and the overall investing landscape, you should try to not get too worked up about closely following the day-to-day or minute-to-minute news about it. Ignoring the noise can actually be a better approach. Headlines that may move a stock up or down today could be forgotten in a year or two, or even as soon as tomorrow. So keeping cool and not reacting to every story can save you from bailing on a stock too soon and locking in losses. The most important thing is sticking with your strategy and focusing on achieving your long-term financial goals.
All of the ETFs we use in our portfolios have a prospectus, of course. You can view them anytime via the link on that page.
Investing involves risk including loss of principal. This information is presented for educational purposes only and is not a recommendation to buy or sell a specific security or engage in a particular strategy.