Welcome to the Investors Trading Academy talking
glossary of financial terms and events.
Our word of the day is “Prospectus”
A prospectus is a legal document issued by
companies that are offering securities for
sale.
Mutual funds also provide a prospectus to
potential clients, which include a description
of the fund's strategies, the manager's background,
the fund's fee structure and a fund's financials
statements.
There are two types of prospectuses for stocks
and bonds: preliminary and final.
The preliminary prospectus is the first offering
document provided by a securities issuer and
includes most of the details of the business
and transaction in question.
Some lettering on the front cover is printed
in red, which results in the use of the nickname
"red herring" for this document.
The final prospectus is printed after the
deal has been made effective and can be offered
for sale, and supersedes the preliminary prospectus.
It contains finalized background information
including such details as the exact number
of shares/certificates issued and the precise
offering price.
To get an idea of the role of the prospectus,
let's assume Company XYZ is pursuing an IPO.
Before launching the IPO, Company XYZ must
first file a registration statement, which
discloses all material information about the
company, with the SEC.
Part of the registration statement is the
prospectus, which must be provided to all
purchasers of the new issue.
When the registration statement becomes effective,
Company XYZ will amend the preliminary prospectus
to add such important information as the offering
price and the underwriting spread.
