What Is a Stock Prospectus?

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What Is a Stock Prospectus?

A stock prospectus is a document that contains detailed information about a company that is making a new issue of stock. Similar in many ways to an annual report, it discloses facts about the company’s operations, finances, and management. The prospectus also contains key information about the stock offering itself, how it affects the ownership of the company, and what the company intends to do with the proceeds of the stock offering.

Things To Know

  • A stock prospectus discloses facts about the company’s operations, finances, and management.
  • There are two basic kinds of stock prospectus.
  • The prospectus is also a sales tool used to help find potential investors.

Why do companies issue stock prospectuses? To begin with, it’s the law. The Securities Act of 1933 requires companies to disclose information about their financial status to potential investors; in fact, the stock prospectus is an abridged version of the information companies must file with the Securities and Exchange Commission before they can issue stock.

The prospectus can also be a sales tool

Beside the legal requirements, however, the prospectus is a sales tool used to help find potential investors. Although companies are strictly limited in the kinds of marketing statements they can make in a prospectus, they can present information about their fiscal status, their business plan with market forecasts, the strengths of their managers, and other details they hope will convince investment analysts and investors themselves that the company’s stock is a good buy.

The two types of prospectuses

There are two basic kinds of stock prospectus. The preliminary prospectus, also known as the red herring, is published after the company files with the SEC but before the stock is actually available for sale (known as the cooling-off period). It’s published by the investment firm that is managing the stock offering in order to stimulate interest in the stock. The nickname comes from the fact that the preliminary prospectus contains red ink in various sections to mark information that has not yet been finalized, such as the offering price and the effective date (the date the stock may actually be offered to the public).

The final prospectus is published, usually by the company itself, when the offering price and effective date are set. Not until the final prospectus is available can potential investors analyze such critical indicators as the stock’s price-to-earnings ratio.

How to find them

You can get a copy of the final prospectus by writing to the company itself, or from the investment firms that are underwriting the offering. There are a growing number of online sources for stock prospectuses as well, and the company’s filings with the SEC are available on the EDGAR Website www.sec.gov/edgar.shtml.