Morgan Stanley Finance Issues Principal-at-Risk Structured Notes Linked to Stock Index Performance

Structural Design and Coupon Mechanics of the Issued Securities

The securities issued by Morgan Stanley Finance LLC offer investors a fixed coupon payment of 10.10% per annum, payable monthly on the third calendar day of each month. The final coupon payment will be made on the maturity date of September 3, 2027. This coupon rate applies regardless of the underlying index performance, meaning investors receive this income stream throughout the holding period as long as Morgan Stanley meets its obligations.

The monthly coupon payment schedule reflects a standard approach to distributing income across 13 expected payment dates, from September 3, 2026 through the maturity date in September 2027. The structure ensures consistent cash flow to investors, a feature that distinguishes these securities from traditional equity investments. However, investors must recognize that the coupon payments do not insulate them from principal loss, which remains the defining risk characteristic of this instrument.

Principal-at-Risk Mechanism and Trigger Event Structure

The core feature distinguishing these securities is the principal-at-risk mechanism tied to daily monitoring of both the S&P 500 Index and Russell 2000 Index. A trigger event occurs if either underlier closes below its designated downside threshold level on any trading day from the pricing date through the observation date of August 31, 2027. The downside threshold for each index is set at 75% of its initial level established on the strike date of July 31, 2026.

If no trigger event occurs during the monitoring period and both indices remain at or above their threshold levels on every trading day, investors will receive full repayment of the stated principal amount of $1,000 per security at maturity. Conversely, if either index breaches its 75% threshold on any single trading day, investors become exposed to the negative performance of the worst-performing index between the two. Under these circumstances, the payment at maturity will be reduced proportionally based on the percentage decline of the worst-performing underlier, with no floor protection other than zero.

Index Selection and Performance Measurement Methodology

The securities are linked to two widely-followed equity indices: the S&P 500 Index, representing large-capitalization U.S. equities, and the Russell 2000 Index, representing small-capitalization U.S. equities. The initial level for each index is determined by its closing level on the strike date of July 31, 2026. The final level for performance calculation purposes is the closing level on the observation date of August 31, 2027, subject to postponement for non-trading days and certain market disruption events.

The performance factor for each index is calculated as the final level divided by the initial level. The worst-performing underlier is identified as the index with the lowest percentage return from initial to final level. This comparative methodology means that even if one index performs well, poor performance by the other index will trigger principal reduction. The disclosure notes explicitly that linking the securities to multiple indices does not provide diversification benefits; rather, it concentrates downside risk because negative movement in either index can impair investor returns.

Principal Loss Scenarios and Downside Exposure Details

The filing describes multiple scenarios for principal repayment depending on index performance outcomes. If a trigger event occurs and the final level of either underlier falls below its initial level, the stated principal amount will be multiplied by the performance factor of the worst-performing index. This calculation means that a 20% decline in the worst-performing index would reduce principal repayment by 20%, resulting in a payment of $800 per security instead of the full $1,000.

The filing explicitly warns that under these circumstances, the payment at maturity could be zero. This outcome would occur if the worst-performing index declines 100% from its initial level to its final level. Additionally, the securities contain no participation mechanism; investors will not benefit if either index appreciates during the holding period. The combination of unlimited downside exposure and zero upside participation represents the fundamental risk-return asymmetry of this structure.

Issuance Details and Distribution Channel Structure

Morgan Stanley Finance LLC is the issuer of these securities, with Morgan Stanley serving as guarantor. The stated principal amount is $1,000 per security, and the issue price equals the stated principal amount. The aggregate principal amount was not disclosed in the announcement. The securities carry a CUSIP of 61781GF22 and an ISIN of US61781GF221 and will not be listed on any securities exchange.

Distribution occurs exclusively through fee-based advisory accounts. Morgan Stanley & Co. LLC, an affiliate of MSFL and wholly owned subsidiary of Morgan Stanley, serves as agent. The announcement indicates that MS & Co. expects to purchase all securities from the issuer and sell them to an unaffiliated dealer for subsequent distribution to fee-based advisory accounts at the $1,000 public price. MS & Co. will not receive a sales commission with respect to these securities. The estimated value of the securities on the pricing date is approximately $987.30 per security, or within $35.00 of that estimate, reflecting the cost of issuance, structuring, and hedging embedded in the offering price.

Credit Risk and Guarantee Structure Governing Investor Protection

The securities are unsecured obligations of Morgan Stanley Finance LLC and are fully and unconditionally guaranteed by Morgan Stanley, the parent company. All payments of principal and coupon are subject to Morgan Stanley's credit risk. The guarantee means that if MSFL faces insolvency or default, investors look to Morgan Stanley's creditworthiness for satisfaction of claims. However, these securities are not secured by any collateral, lien, or security interest in underlying reference assets.

The filing emphasizes that these securities are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. The guarantee structure provides no mitigation of the principal-at-risk mechanism; even with the parent company guarantee in place, investors remain exposed to full loss of principal if trigger events occur and the worst-performing index declines substantially. Investors depend entirely on Morgan Stanley's ability and willingness to honor its guarantee obligations.

Target Investor Profile and Risk Tolerance Requirements

The disclosure identifies the intended investor base as those seeking above-market interest rates in exchange for accepting principal risk. The 10.10% annual coupon rate is characterized as potentially above-market, reflecting compensation for the leverage and downside exposure embedded in the structure. The announcement explicitly states that these securities are intended for investors willing to accept the risk of losing their entire initial investment based on performance of either underlier.

The filing notes that restriction to fee-based advisory accounts suggests these securities are distributed through wealth management channels rather than traditional retail brokerages. Fee-based account structures typically serve high-net-worth investors with sophisticated financial advisors overseeing their portfolios. The underlying message is that investors in these securities must possess sufficient financial sophistication and risk capacity to understand and tolerate the principal loss scenarios described.

Registration and Regulatory Framework Applicable to This Offering

The preliminary pricing supplement references Registration Statement Nos. 333-293641 and 333-293641-01, filed pursuant to Rule 424(b)(2) under the Securities Act of 1933. The securities are issued under Morgan Stanley Finance LLC's Series A Global Medium-Term Notes program. Related documentation includes a product supplement dated April 8, 2026, an index supplement dated April 8, 2026, a tax supplement dated April 8, 2026, and a prospectus dated April 8, 2026.

The announcement includes standard regulatory disclaimers that the Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if the disclosure documents are truthful or complete. Investors are directed to review the complete product supplement, index supplement, tax supplement, and prospectus to fully understand all terms and risks before making investment decisions. The preliminary nature of this pricing supplement means that final terms may differ from those described.

Pricing Considerations and Embedded Cost Structure Analysis

The issue price of $1,000 per security includes the cost of issuing, selling, structuring, and hedging, with these costs borne by investors. The estimated value on the pricing date of approximately $987.30 per security indicates that the embedded costs and hedging margin reduce the intrinsic economic value by roughly $12.70 per security, or approximately 1.27% of the initial investment. This valuation gap reflects the cost of creating and managing the structured product.

The final pricing supplement, expected to follow this preliminary supplement, will specify exact commission amounts, agent fees, and proceeds to Morgan Stanley Finance LLC. The announcement notes that commissions and fees are blank in this preliminary version and will be disclosed upon finalization. This structure allows Morgan Stanley to capture issuer revenues while presenting a published price of $1,000 to advisory account investors.