What Is a Prospectus?

Quick Answer

A prospectus is a legal document that provides key information for investors. Prospectuses are required by law for mutual funds, exchange-traded funds, stocks and bonds.

Two people reviewing investing documents on a table with a laptop nearby.

A prospectus is a document filed with the U.S. government that provides factual details about a business that issues certain investment securities.

Before investing in a stock, bond or fund, investors should carefully review prospectuses to get a better idea of how the company or fund is managed and its long-term prospects.

What Is a Prospectus?

A prospectus is a legal disclosure for investors who are considering investing in a stock, bond, mutual fund or exchange-traded fund (ETF), giving them basic but important information about the opportunity.

The U.S. Securities and Exchange Commission (SEC) requires companies and funds that issue these securities to investors to make prospectuses publicly available and to file them directly with the SEC.

Investors who are thinking about investing in a stock, bond or fund should consult its prospectus to ensure that the investment aligns with their strategy.

How to Access Investing Prospectuses

Company prospectuses, which are issued by companies making an initial public offering of a stock or a new bond issuance, can be found on the company's website or in the SEC's EDGAR database.

For mutual funds and ETFs, you can typically get access to a fund prospectus through your brokerage firm or financial advisor.

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How Do You Read an Investing Prospectus?

Depending on the type of investment, you'll want to pay attention to different bits of information on a prospectus.

As you review the legalese, focus on the company's financial strength and potential risks. While you can't always accurately predict which investments are winners, knowing what you're investing in can make it easier to avoid bad investments.

Company Prospectus

When you buy a stock or bond, what you're really investing in is the company's performance. As a result, a company prospectus will provide you with key details that can help you evaluate how well the company is managed, its future prospects and the potential risks. Here's a quick summary of what you can expect:

  • Company history
  • Description of the company's management
  • Financial statements
  • Expected date and price of issuance
  • Major shareholders
  • Ticker symbol (for stocks)
  • Risks to the business and its investors
  • Dividend policy (for stocks)

Fund Prospectus

Mutual funds and ETFs serve different purposes for investors compared to individual stocks and bonds, primarily in helping them create a more diversified portfolio.

However, not all funds are created equal, so it's important to focus on ones that help you reach your goals without charging excessive fees. As you read a fund prospectus, here's what you'll typically find:

  • Fund managers
  • Fund objectives and strategy
  • Distribution policy
  • Fees
  • Historical performance
  • Risks for investors

How Important Is a Prospectus When Making Investments?

Developing a diversified investment portfolio can take a lot of time and research. Depending on your goals, time horizon and risk tolerance, you want to make sure you put your money into securities that contribute positively to your strategy.

You may be tempted to make investment decisions based only on surface information, such as recent prices and performance. It's also easy to get caught up in the hype of investment news sources or social media. But if you want to make sure your information is accurate and unbiased, prospectuses are designed to give you only the facts.

Of course, all investments carry some element of financial risk, but getting a full picture of how the company or fund is managed and its performance can give you the confidence you need to determine whether the security has enough potential upside to be worth the risk for you.

That said, prospectuses aren't necessarily easy reading. If you're having trouble interpreting the information you find in a prospectus, consider asking a financial advisor for some help.

The Bottom Line

Investing for the future is a crucial element of a strong financial plan. But putting together a solid investment portfolio that aligns with your goals can be challenging. While it takes time, it's important to ensure that you have a full understanding of the securities you're including in your portfolio, and prospectuses can offer a lot of the details you need to accomplish that.

If you're feeling overwhelmed or you aren't sure about managing your own investments, consider seeking out a financial advisor who can review your situation and goals and provide you with expert guidance.