Material Information

Material information is any detail about a publicly traded company's plans, operations, or business conditions that would help a prudent investor decide whether to buy, sell, or hold shares of stock in the company. Investors desire information that will help them (is material) to decide whether to buy, hold, or sell the stock of any publicly traded company.

Material is a key term in investor relations. The Securities and Exchange Commission (SEC) requires publicly traded companies to disclose all material information. Various investor relations tools are used to accomplish this task, especially since the SEC also requires that such notice be made in a public manner so that all interested investors have the same opportunity to obtain and use the information. Thus, disclosure of material information must be open, broad, and timely.

In reference to timely, the SEC offers two broad standards. One is that some investors should not have the opportunity to get the information before it is made available to all investors. Also, the information must be shared so that it is most relevant to stock transactions because it is not out of date.

Companies get into trouble when their sense of what information is material or relevant to stock transactions differs from that of investors. Companies that make that error can incur the wrath of the SEC and investors if material information is not available when it is most relevant to those persons wanting to make stock transactions.

Material information comes in many forms. One type is the likelihood that the corporation will produce a profit or suffer a loss. A major change in senior personnel or the health of a senior executive could be material. It is often believed that key executives have a major influence on the business. Thus, the condition of these personnel is material.

If a company is suffering a substantial lawsuit, a dramatic change in the market, the arrival or loss of a major competitor, or implementation of a new process, that information is likely to be material. If an agriculture company has operations that are likely to be affected by the weather (drought or excessive rain, for instance), that is material.

The SEC uses rules and regulations to define what is material. Investigations are launched and audits are performed to increase the likelihood that material information is properly revealed in a timely fashion. For this reason, an ostensibly independent auditing firm to ensure objective compliance with SEC expectations audits the books of each publicly traded company.

Regulations, statutory law, and case law constitute a huge body of expert guidelines that are to be applied by executive management in conjunction with legal counsel and auditing firms to ensure that prudent stock traders get information they need and deserve.