Underwriter

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Financial Terms and Glossary

Underwriter

An underwriter is a financial institution, usually an investment bank, that evaluates and assumes the risk of issuing new securities, such as stocks or bonds, on behalf of a company. Underwriters play a crucial role in the initial public offering (IPO) process, determining the offering price, buying the securities from the issuing company, and selling them to investors. Underwriters can also be involved in insurance, assessing risk and providing coverage for policyholders.

Example

In an IPO, the underwriter agrees to purchase all the shares being issued by a company and then sells them to the public, ensuring that the company raises the intended capital.

Key points

• A financial institution that assesses and assumes the risk of issuing new securities.

• Plays a key role in IPOs and other capital-raising activities by determining the price and distributing the securities.

• Also involved in insurance, where they assess and underwrite risks.

Quick Answers to Curious Questions

What is the role of an underwriter in an initial public offering (IPO)?

The underwriter determines the offering price, buys the shares from the company, and sells them to the public, helping the company raise capital.

Why is the underwriter’s role crucial in securities issuance?

Underwriters help manage the risk of issuing new securities and ensure that the company raises the necessary funds while setting an appropriate price for investors.

How do underwriters make money in the IPO process?

Underwriters earn fees for their services and may profit from the difference between the price they pay to the company and the price at which they sell the shares to the public.