Importance of a Prospectus

A prospectus is a document that companies and others file with the Securities and Exchange Commission when they are offering new shares of a security to the public. One of the most common reasons for issuing a prospectus is when a company is making an initial public offering, putting shares of stock up for sale for the first time. Mutual funds issue a prospectus at regular intervals because they routinely make new shares available.

Issuer Information

Among the most salient details in the prospectus for a new stock are the descriptions that the company offers of itself, its assets, its operations, its goals and its business plan. The prospectus also features a section known as "certain considerations," which explains any particular risk factors that could impede the success of the company and harm a shareholder's investment in its stock. Other company information includes an examination of the competition, pending legislation and the broader economy and its influence on the company. A prospectus for a stock also features a financial statement for the company and the opinion of an independent auditor about the company's financials. A bond prospectus similarly features relevant financial information about the corporation or public entity issuing the bond.

Offering Information

In addition to issuer information, a prospectus for a stock or bond offering includes information about the security itself. It describes the number of shares or bond certificates being sold in an offering, the price, the underwriter and how the security will be available for purchase. For either a stock or a bond, the prospectus should specify how the company or public entity that is selling the security will use the funds that are being raised from the sale. If the prospectus is for a stock, it will include information about its dividend policy and it will describe the different classes of stock and the voting rights for shareholders.

Mutual Fund Activity, Objectives and Leadership

A mutual fund prospectus details the performance of the fund, often including both recent quarterly results and those from previous calendar years. It also specifies the various goals for the fund and the basic overarching investment strategies that guide it. For instance, the prospectus for a fund might indicate that the fund invests in American stocks with strong long-term growth potential. This type of description gives investors an opportunity to review a fund's objectives to make sure that they match the investors' own goals. The identity of the managers who are steering the fund also often appears in the prospectus.

Mutual Fund Fees, Expenses and Guidance

A mutual fund prospectus provides investors with guidance to help with their role as shareholders. For instance, it gives investors instructions on their tax obligations related to the shares that they own, and it also details instructions on how to buy and sell shares of the fund. The prospectus provides a reliable place for investors to track down the various fees that are attached to owning shares of the fund, such as the amount of the management fee. In addition, the prospectus is a document that an investor can study in order to understand all of a fund's expenses to determine if it is operating efficiently enough for the investor's taste.