Underwriting
Underwriting is an investment bank's guarantee to buy a new securities issue from the issuer at an agreed price and resell it to investors, earning the underwriting spread for bearing that risk.
What it is
See it move
An underwriter buys 2,000,000 new shares from the issuing company at €18.50 each and resells them to the public at €19.75 each. The underwriting spread is €19.75 − €18.50 = €1.25 per share, so the bank earns 2,000,000 × €1.25 = €2,500,000 in total, while the company receives 2,000,000 × €18.50 = €37,000,000 in net proceeds.
The formula
Variables
- Underwriting spread per share (€)
- Public offer price per share (€)
- Price the underwriter pays the issuer per share (€)
The underwriter's gross profit per share for guaranteeing and distributing the issue; multiplied by the number of shares issued gives the total spread.
Check yourself
An underwriter agrees to buy 500,000 new shares from an issuing company at €12.20 each and resell them to the public at €12.80 each. What is the underwriter's total spread on the issue?