Morgan Stanley Finance LLC Issues Dual Directional Trigger Jump Securities Linked to Russell 2000 and S&P 500 Indices

Product Structure and Payoff Terms

The securities issued by Morgan Stanley Finance LLC represent a complex structured investment product designed to provide exposure to the performance of two equity indices simultaneously. The product is constructed as a dual-directional security, meaning the final payoff depends on the performance of the worst-performing of the two underlying indices—the Russell 2000 Index and the S&P 500 Index. This structure creates a binary risk scenario where investors' returns are determined entirely by whichever index performs least favorably over the three-year holding period. The stated principal amount is $1,000 per security, with an original issue price matching this amount, though the estimated value on the pricing date is approximately $962.80 per security, reflecting the embedded costs of structuring and hedging the product.

The payment structure at maturity operates according to three distinct scenarios based on the final performance of the worst-performing underlier. When both indices finish above their initial levels, investors receive the stated principal amount plus the greater of two payments: either a return based on the percentage change of the worst-performing index, or a fixed upside payment of $295 per security (representing 29.50% of the stated principal amount). This construction allows investors to benefit from upside performance while receiving a floor payment that may exceed the index-based return in certain scenarios. The upside payment feature provides defined participation in favorable market conditions for investors willing to accept principal-at-risk characteristics.

Downside Protection Mechanism and Loss Scenarios

The securities incorporate a tiered downside protection mechanism that distinguishes between moderate declines and severe losses. When the final level of either index falls below its initial level but remains at or above the downside threshold level of 80% of its initial level, investors receive the stated principal amount plus a positive return calculated as the absolute value of the worst-performing index's percentage decline multiplied by a 100% absolute return participation rate. The disclosure indicates this effectively limits the positive return to a maximum of 20% under these circumstances. This structure provides meaningful protection against modest market declines, allowing investors to recover losses or achieve positive returns even if the indices decline moderately over the three-year term.

The most severe loss scenario occurs when either index declines below its 80% downside threshold level. In this case, investors lose $1 for every $1 decline in the worst-performing index, meaning the payment at maturity will be significantly less than the stated principal amount and could theoretically reach zero. This unlimited downside exposure represents the principal-at-risk component that investors must explicitly accept when purchasing these securities. The filing emphasizes that investors must be willing to accept the risk of losing their entire initial investment based on the performance of either underlying index, as there is no floor protection beyond the 80% threshold level for either the Russell 2000 or S&P 500 Index.

Underlier Selection and Diversification Considerations

The securities are based on two major equity indices: the Russell 2000 Index, representing small-capitalization stocks, and the S&P 500 Index, representing large-capitalization stocks. The filing explicitly states that the fact that the securities are linked to more than one underlier does not provide asset diversification benefits. Instead, the use of two indices creates a "worst performer" outcome where the deterioration in either index can negatively affect the investment return. This means that even if one index performs well or maintains its initial level, investors' returns are constrained by whichever index performs poorly. The worst-performing underlier is determined as the index with the lowest percentage return from its initial level to its final level on the observation date.

The strike date and pricing date for the securities are both set for July 31, 2026, with the observation date falling on July 31, 2029, subject to postponement for non-trading days and certain market disruption events. The initial levels for each index will be established on the strike date, and the final levels will be determined on the observation date. This three-year observation period exposes investors to equity market volatility across both indices over an extended timeframe. The structured design means that investors cannot benefit from diversification between the two indices; instead, they are effectively short the spread between the two indices' performances, as their return is determined entirely by the weaker performer.

Credit Risk and Guarantee Structure

The securities are unsecured obligations of Morgan Stanley Finance LLC and are fully and unconditionally guaranteed by Morgan Stanley, the parent company. This guarantee structure represents the credit backstop for the securities, meaning that if MSFL were unable to meet its payment obligations, Morgan Stanley would be responsible for all payments due at maturity. The filing explicitly discloses that all payments are subject to Morgan Stanley's credit risk, and that investors could lose some or all of their investment if Morgan Stanley defaulted on its obligations. The securities are not secured obligations, meaning investors do not have any security interest in or access to any underlying reference assets in the event of default by the guarantor.

As principal-at-risk securities, these instruments carry credit exposure in addition to market risk. The filing notes that these securities are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality, nor are they obligations of or guaranteed by a bank. This distinction is important for investors considering the regulatory and protection framework surrounding their investment. The unsecured nature of the securities means that in a bankruptcy or default scenario, investors would be general unsecured creditors with no priority claim on any specific assets.

Pricing Methodology and Estimated Value

The original issue price of $1,000 per security includes costs associated with issuing, selling, structuring, and hedging the securities, all of which are borne by investors. Consequently, the estimated value of the securities on the pricing date is less than the $1,000 issue price. The disclosure indicates that the estimated value will be within $45.00 of approximately $962.80 per security, with the precise estimate to be set forth in the final pricing supplement. This estimated value reflects the incorporation of multiple cost factors into the initial offering price, effectively reducing the net value investors receive at inception.

Morgan Stanley uses its own pricing and valuation models, market inputs, and assumptions relating to the underliers to determine the estimated value on the pricing date. The valuation approach treats the securities as comprising both a debt component and a performance-based component linked to the underliers. The methodology incorporates assumptions about volatility, expected interest rates, and an interest rate related to Morgan Stanley's secondary market credit spread, which represents the implied interest rate at which the company's conventional fixed-rate debt trades in the secondary market. This multi-factor valuation approach reflects the complexity of pricing instruments with embedded equity derivatives and credit components. Investors should note that the estimated value on the pricing date does not reflect potential secondary market value changes, which may occur after the initial issuance.

Investor Profile and Suitability Considerations

The securities are designed for investors who seek a return based on the performance of the worst-performing underlier and who are willing to risk their principal and forgo current income in exchange for specific features of the product. These features include the upside payment of $295 per security, the absolute return participation feature that provides positive returns when both indices decline moderately, and the limited protection against loss of principal provided by the 80% downside threshold. The stated investor profile explicitly indicates that these securities are not suitable for risk-averse investors or those seeking current income, as the securities pay no interest and offer no guarantee of principal return at maturity.

The filing emphasizes that investors must be willing to accept the risk of losing their entire initial investment based on the performance of either underlier. This risk is not theoretical; it is embedded in the structure of the securities. An investor who purchases these securities at the $1,000 issue price, with an estimated value of $962.80, is immediately accepting a value reduction of approximately $37.20 per security before any market movements occur. The product is suited only for sophisticated investors with adequate risk capital, a specific view on equity market range-bound performance, and the ability to hold the securities to maturity without requiring liquidity before August 3, 2029.

Registration and Distribution Framework

The securities are issued under Morgan Stanley Finance LLC's Series A Global Medium-Term Notes program and are registered under Registration Statement Nos. 333-293641 and 333-293641-01. The preliminary pricing supplement is dated June 23, 2026, and was filed pursuant to Rule 424(b)(2) under the Securities Act of 1933. Morgan Stanley & Co. LLC, an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley, serves as the agent for the offering. The agent is responsible for distributing the securities and coordinating with selected dealers and their financial advisors, who will collectively receive fixed sales commissions from the agent for each security sold.

The securities will not be listed on any securities exchange, meaning they will trade only through over-the-counter channels if investors seek to exit positions prior to maturity. The CUSIP number for the securities is 61781GY21, and the ISIN is US61781GY214. These identifiers are used to track and settle the securities in the financial system. The absence of exchange listing means that secondary market liquidity cannot be assured, and investors may face significant bid-ask spreads or lack of available buyers if they attempt to sell before maturity. The distribution process is governed by the plan of distribution outlined in the accompanying product supplement, which addresses conflicts of interest inherent in Morgan Stanley's role as both the issuer and distributor of the securities.

Material Terms and Key Dates

The strike date and pricing date are both July 31, 2026, establishing the initial levels for both indices. The original issue date is August 5, 2026, meaning investors will take ownership of the securities four days after the pricing date. The observation date is set for July 31, 2029, subject to postponement for non-trading days and certain market disruption events. The maturity date is August 3, 2029, just three days after the observation date, which is the date on which the final payments to investors will be made. These dates are fixed unless market disruption events occur that require postponement of the observation date.

Each underlier's initial level will be its closing level on the strike date (July 31, 2026), while the final level will be its closing level on the observation date (July 31, 2029). Calculated levels are rounded to three decimal places for purposes of determining the performance factor and other calculations. The downside threshold level for each index is set at 80% of its initial level, a mathematically significant level because it establishes the boundary between the moderate decline protection scenario and the unlimited downside loss scenario. Understanding these key dates and thresholds is essential for investors evaluating the risk-return profile of the securities.

Offering Size and Cost Structure

The disclosure in the preliminary pricing supplement does not state a specific aggregate principal amount for the offering. The company did not disclose this figure in the filing. This indicates that the final offering size will be determined at or near the pricing date based on market demand and Morgan Stanley's assessment of appropriate hedging requirements. The commissions and fees to be paid to selected dealers are also not specified in the preliminary pricing supplement, with these amounts to be disclosed in the final pricing supplement once pricing is finalized. The structure of dealer compensation as fixed sales commissions per security sold means that total dealer compensation scales with offering size.

The pricing structure includes the agent's commissions and fees, which are deducted from the stated principal amount of $1,000 per security before proceeds flow to Morgan Stanley Finance LLC. The estimated value on the pricing date of approximately $962.80 per security reflects not only the agent's commissions but also the costs of structuring the securities, hedging the embedded equity derivatives, and the bid-ask spread inherent in the valuation model. These costs are economically borne by investors through the difference between the issue price and the estimated secondary market value immediately after issuance. The use of proceeds and hedging strategy are described in the accompanying product supplement, which investors should review in conjunction with this pricing supplement.

Risk Factors and Investor Considerations

The securities involve risks not associated with an investment in ordinary debt securities, as emphasized in the filing. The primary risk is that the securities are principal-at-risk, meaning there is no guarantee of return of the initial investment amount. If either underlying index declines more than 20% from its initial level, investors will suffer losses that are magnified by the "worst performer" structure of the securities. Additionally, investors are exposed to Morgan Stanley's credit risk; if Morgan Stanley were unable to meet its obligations, investors could lose some or all of their investment regardless of the underlying index performance. The securities are not protected by deposit insurance or other government guarantees that would apply to traditional bank deposits or federally insured instruments.

Investors should also be aware that the estimated value of approximately $962.80 on the pricing date represents a significant discount from the $1,000 issue price, reflecting the real economic costs of creating and hedging the product. This initial loss of value must be overcome through favorable index performance before investors can achieve a positive return. The three-year holding period exposes investors to volatility across both indices, and the worst-performer structure means that strong performance by one index cannot fully offset weakness in the other. For investors considering these securities, careful review of the complete product supplement, index supplement, and prospectus is essential, as the preliminary pricing supplement contains only a summary of key terms.