What you should know about a prospectus

Before you invest in shares, make sure you know what you're getting into with this legal disclosure document.

Woman with papers reviewing her prospectus on the computer.

What is a prospectus?

Technically, a prospectus is a required disclosure document filed with the Securities and Exchange Commission (SEC). It provides information about the company, its history and what it is offering to help a person to make an informed investment decision.

What information is included in a prospectus?

For stocks and bonds, a preliminary prospectus gives details about the company and the transaction before any securities are issued. Its purpose is to drive interest. After the offering is finalized and available for sale to investors, the final prospectus is then issued and provides all the details of the investment being offered along with the number of shares or certificates available and the price.

A mutual fund prospectus can be lengthy. Some fund companies might use a summary prospect that covers key information about the fund.

A prospectus may contain the following information:

  • Background on the company and the current financial situation
  • Number of shares being issued
  • Investment objective (its overall investment purpose)
  • Fees and expenses (such as sales charges, if any, management fees, 12b-1 distribution fees, etc.)
  • Principal investment strategies (how the fund intends to invest to attempt to satisfy its investment objective)
  • Principal risks, including a narrative description of the fund's risks and including an illustration of the fund's historical investment performance (including one-, five- and ten-year average annual returns)
  • Portfolio managers
  • Procedures regarding how to purchase and sell the fund's shares including minimum investment amounts
  • Tax information including information about payments to persons who sell the fund's shares, if applicable
  • Information about dividends

Before investing in a stock, bond or mutual fund, you should review its prospectus to determine if the investment is right for you.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

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