Understand what a Prospectus is

What to Watch For In a Prospectus
Here are a couple of things that you need to keep in mind:

  • Make sure you understand how a public listing of a company is carried out. For example, in a new float you may send in your cheque and be under the impression that you will receive a proportion of the shares that you have applied, if the float is oversubscribed.

    This is not true because under the law the directors of a company do not have to do this. Provided the company issues shares according to what it says it will do in the prospectus then you won't have any recourse if you miss out on the shares.

  • Understand all the assumptions in the forecast contained in the prospectus. Companies will make profit forecasts in the prospectus which often are not met. This means you need to study the prospectus and make a decision on whether those assumptions are reasonable and whether the forecasts are going to be met.

    The company has to show the assumptions in the prospectus including the likelihood of them being met and the effect on the company if the forecasts are not met.

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