It’s about time for spring cleaning, and what better way to kick off spring than to get your financial house in order while you’re reorganizing your living space. If you’re thinking of making investments with your money, there’s a lot to consider. But before you make a move, it’s a wise idea to check out a company’s stock prospectus! You’ll certainly want to do this before making any investment decisions.
A prospectus is a formal, legal document that is required by and filed with the Securities and Exchange Commission. It provides all details regarding an investment offering for sale to the public, including an Initial Public Offering (IPO). For instance, the prospectus includes investment objectives and strategies, as well as past performance, risks, performance distribution policy, fees and expenses and fund management.
Here are other details you can find in the prospectus:
The company directors and advisors
Key statistics relating to the issue, such as the number of shares; the price; the market capitalization at that price; the proceeds the company will receive from an IPO
The trading history of the company, usually for the past three years
Illustrative financial objectives and the main risk factors associated with investing in the company
A profit and loss account, balance sheet and notes relating to both
The executives’ former directorships
Significant legal or tax matters related to an IPO
How to apply for shares and the terms of applications
As you can see, the prospectus gives you a clearer picture of where you are investing, and it helps to keep you from being misled. You can obtain the prospectus by mail, phone and email or through a financial planner or advisor. In some instances, you can view it on a company’s website. Once you obtain the report, you might find that it’s not a very exciting document to sift through; however, it is necessary for you to obtain in order to make an educated decision before investing. You might also find it difficult to read or interpret. That’s normal. But here, you’ll find some interpretations that might help you when you obtain your own documents.
Here’s some sample language from a prospectus for a company. Let’s start with the “Risk Factors” section, which contains important information for you to know.
The Prospectus Says: “Information contained in this prospectus relative to markets for the company’s products and trends in net sales, gross margin and anticipated expense levels, as well as other statements including words such as ‘anticipate,’ ‘believe,’ ‘plan,’ ‘estimate,’ ‘expect’ and ‘intend,’ and other similar expressions, constitute forward-looking statements…actual results of operations may differ materially from those contained in the forward-looking statements…”
Interpretation: Every forward-looking figure in the prospectus is only a projection. Therefore, there is no guarantee the company will meet all or even any of its targets for sales or profits.
Here’s what else the company says under “Risk Factors.”
The Prospectus Says: “Risks for the Company include, but are not limited to, an evolving and unpredictable business model and the management of growth…There can be no assurance that the company will be successful in addressing such risks, and the failure to do so could have a material adverse effect on the company’s business prospects, financial condition and results of operations.”
Interpretation: This company faces substantial risks. If it fails to address these potential pitfalls–this is always possible–there’s a good chance that the company will go broke.
The Prospectus Says: “The Company believes that it will incur substantial operating losses for the foreseeable future, and that the rate at which such losses will be incurred will increase significantly from current levels. Although the company has experienced significant revenue growth in recent periods, such growth rates are not sustainable and will decrease in the future.”
Interpretation: According to the prospectus, this company is losing money and will continue to lose money in the foreseeable future. Company growth rates will slow.
If you find such statements in a company’s prospectus, this is like finding a gold mine. It tells you that profits will be negative for some time. This is definitely what you want to know before you invest in it.
Reading the prospectus means getting through some legalese and cautionary statements that tend to protect the company more than the investor. Nevertheless, the legal nature of the prospectus can provide the investor with important information about the company and its prospects as an investment tool. When reading the prospectus, pay more attention to information that is unique to the company, rather than information that might apply to any public company. Look at the experience of the principals and managers; their track record of success may provide confidence for the success of a new venture. Do some of your own product or market research to get a feel for its viability.
When you do your homework by investigating a prospectus, you are more likely to become a wise investor of your money! HLM
Sources: bankrate.com, incademy.com, investinganswer.com, investopedia.com, nasdaq.com and sharebuilder.com.