Why prospectus is important

Mutual Funds. Mutual Fund Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Investing Investing Essentials. What Is a Prospectus? Key Takeaways The Securities and Exchange Commission requires that security issuers file a prospectus when offering investment securities to the public. A mutual fund prospectus contains details on investment objectives, strategies, performance, distribution policy, fees, and fund management.

The risks of the investment are typically disclosed early in the prospectus and then explained in more detail later in the document. Why Is a Prospectus Useful for Investors? What Information Is Normally in a Prospectus? Article Sources. Investopedia requires writers to use primary sources to support their work.

These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Mutual funds offer prospectuses to interested investors. A mutual fund is a collective investment scheme that involves pooling money to buy a large number of assets.

The mutual fund prospectus gives you an idea of what securities are held by the group and how they have performed. You can view the exact holdings of the fund and find out whether the investments match your individual risk tolerance.

In the prospectus, you can learn what the goals and objectives of the investment company are. This can be valuable when choosing a long-term investment strategy.

For example, if you are seeking mutual funds that can provide long-term growth, you want a fund that has this as a primary objective. If not, you could end up investing in a fund that provides regular income instead of long-term growth. It also details potential risks the company faces, including how long it's been around, management experience and involvement level, and the market capitalization of the issuer.

Filing a prospectus protects the issuing company from claims that relevant information was not made clear or available. The consequences of including false information in a prospectus are severe: Those responsible for misleading information on a prospectus are subject to both civil and criminal penalties, including fines and potential imprisonment.

However, just because the information is there doesn't mean investors don't still have the responsibility to do thorough background research. Interested investors should still evaluate the issuing company's financial documents to understand exactly how much risk they're taking on and the likelihood that they'll eventually be paid back. A prospectus typically comes in two forms: a preliminary prospectus and a final prospectus.

It takes time for a complete prospectus to be finalized, and a company typically releases a preliminary prospectus before a final one to gauge investor interest. A preliminary prospectus is the first iteration of the document, and includes most of the same information that's required on the final prospectus, except for the number of shares that will be issued and how much they'll be issued for.

This is because a preliminary prospective aims to assess market interest in a certain security, meaning it precedes its official market debut. The final prospectus is typically filed after a company has issued an IPO , or officially gone public in the market. It includes all of the details of the offering, updated background information on the company, and the number and price of that security's shares.

EDGAR houses many different types of filings and documents, but the best way to search for a prospectus is to type the company's name or ticker symbol in the search bar. If you're overwhelmed by the idea of reading a prospectus in its entirety and sifting through the jargon, fear not. However, going through this document can be beneficial, as a prospectus provides a portrait of the investment and a broader understanding of a company's business objectives and goals.

Note that it's best to assess the document with a skeptical and inquisitive eye. A financial advisor is the best person to help you cull the information you need as it relates to your investing goals. A prospectus is a formal document that a company files with the SEC to describe a potential investment offering in detail. It includes information about the company's background and financial position, as well as what investor money will go towards specifically.