Definition of Prospectus
Stocks and mutual funds must file a prospectus with the U.S. Securities and Exchange Commission (SEC) prior to issuing any securities in the public markets. This document becomes available to investors and is considered a crucial part of the due diligence process on investments.
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Features
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A prospectus contains detailed information about most all aspects of a company or mutual fund's business. Investors learn about products and services, executive management and financial history. A prospectus also discloses risks associated with the investment.
Mutual Funds
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On the cover page of a prospectus, investors learn crucial information such as the types of fees charged, historical profits and investment strategy, which provides a glimpse into the types of investments the fund will be making. Fund managers state their investment objectives and limitations without disclosing actual stock selections.
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Stocks
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Companies are required to file a prospectus prior to an initial public offering in the stock market. This is part of a registration statement with the SEC. A company does not typically price its shares until days before an offering, so it may file a preliminary "red herring" first. This refers to red ink used on the front cover, which alerts investors of key missing financial information.
Requirements
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In 2009, the SEC revised regulatory framework for mutual funds. Under the new rules, mutual funds must include an abbreviated summary with concise details about the fund as a cover page, according to the Journal of Accountancy. Fund managers may use this summary in lieu of sending investors an entire prospectus, but must make the complete filing available online.
Considerations
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A prospectus filing is often mired with complicated industry jargon written by lawyers who specialize in finance, according to MSN Money. Filers are also directed to consider all risk factors so that investors are not caught unawares. Despite the time and effort it might take to comb through a filing, the result will lead to a more informed investment decision on the part of investors.
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- Photo Credit Image by Flickr.com, courtesy of Jose Roco
