How to Create a Prospectus

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A prospectus is a formal document that is mandatory for all stocks, bonds, exchange- traded funds (ETFs) and mutual funds. This document is filed with the Securities and Exchange Commission (SEC); and a prospectus outlines the equity with all the proper information needed for an investor to make an informed decision.

Prepare the introduction. This is where you will outline the stock, bond or fund. Be detailed. Be sure to include the company issuer, and other basic information. Secondly, write what the fund's investment objectives are. Include whether it is a fund that tracks an index (S&P or Russell 2000) or a particular sector (energy or financial). Write whether the fund is an aggressive or conservative objective. Include how close the fund tracks the underlying index or sector, which will then be in the third section, principal investment strategies. For example, Standard & Poor's Fund XYZ tracks the S&P index 90 percent with 10 percent of the asset in cash.

Outline the potential risks. Include the asset risk, concentration risk, sector risk, and equity securities risk. Issuer risk, market risk, market trading risk and management risk must also be included. You must outline the holdings that make up the fund, listing each holding and at what concentration it is within the portfolio. The fund's performance should be outlined by the year to date (YTD), five-year performance and performance since inception. This will give the investor an idea how successful the fund is.

Show the distribution history if your fund gives out dividends. If not, include that there is no distribution. Include the fees associated with your fund and any disclaimers.

See the iShares Dow Jones U.S. Consumer Services Sector Fund in Resources for a detailed outline. Do not leave any important information out. The potential investor has the right to know the good and the bad.

References

About the Author

Christopher Lemieux began writing in 2005 for various online publications. After achieving a Bachelor of Science in finance, Lemieux became certified in finance management at Cornell University.

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