Full and accurate information should be available to investors before they invest in a business corporation (company) or mutual fund. Reading a prospectus gives essential information about the company or fund, including information on its products, management team, strategic and financial planning, and risk exposure.
What is a prospectus?
A prospectus is a detailed information document that normally must be prepared whenever a company or fund plans to sell securities (e.g., shares) to the public.
The purpose of a prospectus is to provide full, true and plain disclosure of all material facts relating to the securities being issued to help investors make sound investment decisions. It must disclose all material facts likely to affect the value or the market price of the securities to be distributed.
Prospectus information is presented in a standard format so that investors can more easily compare various possible investments.
A prospectus is a good starting point in your search for information. It contains a great deal of information that you can analyze.End of the insight
Are prospectuses mandatory?
Some companies or funds are not required to file a prospectus to sell shares or other securities. However, certain conditions will apply.
If you are asked to take part in an investment but you are unable to obtain a prospectus, be careful.
Securities that are issued without a prospectus generally cannot be sold to the public and, in most cases, they are subject to resale restrictions.
Why should you read a prospectus?
In reading a prospectus, you should find out the following information:
- Is the company or fund well established or does it have little or no history?
- What business is it in?
- Who are its competitors?
- What are its strategic plans?
- In the case of a company, how does it plan to use investors’ money?
- In the case of a fund, what is its investment strategy?
- Has the company or fund been profitable in the past?
- Has its financial performance been improving or declining in recent years?
- What assets does it hold?
- Does it have substantial debt?
- What other securities have already been issued?
- What are the major risk factors that could affect the future performance of the company or fund?
- Who are the directors and members of management?
- Do they have successful track records?
- Do they have management qualifications?
- How will they be compensated?
- Have they had any regulatory problems in the past?
- Is there a resale market for the securities?
- Will the securities be listed on an exchange?
By examining the prospectus, you will be better able to determine whether the investment suits you and whether the levels of risk and potential return fit your particular investment needs and objectives.