Glossary
Underwriter
The investment bank that manages a securities offering, sets its price with the issuer and buys or sells the new shares or bonds to investors.
On this page
An underwriter is the bank, or group of banks, that brings new securities to market for an issuer. In an IPO or a bond sale, the underwriter helps prepare the prospectus, gauges investor demand, recommends a price and size, and then distributes the securities to buyers. Underwriters matter because they decide who gets shares in a hot offering and they stand behind the pricing.
How it works
In a firm-commitment deal, the underwriters buy the whole issue from the company at a discount and resell it to investors at the offering price; if demand disappoints, they bear the loss. In a best-efforts deal, common for small issuers, they only agree to sell as much as they can. Large offerings are spread across a syndicate led by one or more bookrunners, who collect investor orders during a roadshow and build the "book."
What to keep in mind
Underwriters work for the issuer and earn fees from it, but they also keep relationships with the institutional buyers they allocate to, which can tilt pricing. A large first-day pop is often read as money left on the table for the company. After an offering, the banks usually publish research on the stock and restrict insiders from selling during a lockup. The underwriter's name and reputation are listed on the cover of the prospectus.