underwriting 1: Agreement
underwriting 2: compensation
underwriting 3: syndicate
underwriting 4: Risk tolerance
Quick Pick :
Underwriting is the work done by investment banks in the public market to sell security to public investors. Underwriting is the process and duty of investment bank to help all the business to sell security to public. Before selling any securities to the institution or any public investor.
The investment bank need strong approval from SEC. This SEC approval process and selling security shares after the approval is done by investment bank.
To run this process the bank called this process as underwriting. This process are written by papers of agreement to accept the risk and reward among companies, SEC and investment bank.
Every investment bank have also difference fees for doing this process. this article occupied the information about how this underwriting taken and what they contained in that underwriting process very deeply.
underwriting 1: Agreement
The agreement is to sell all the issued shares to the public, but not guaranteed .
To clear, once the issued security of shares which are from certain companies have to sell it within specified period of time.
Which is like 30 to 60 days from the initial public offering. Once the investment bank failed to sell these securities to the public.
Then the investment bank is responsible for selling unsold shares.
Or to bring the new investor anyway to bought that unsold shares
Companies got the money from investment bank anyway even if they failed to sell the security shares to the public.
Any Companies have got the money on hand, investment bank taking the risk to sell the shares.
Suppose they find investor for half of whole issued shares and other half are unsold.
Which investment bank take full responsible for any unsold shares at first and even if the current investor sell it again the already bought shares.
Investment bank would buy it back by reducing the investors fear and make that all shares available to the new investors anytime.
This is Main agreement between the company and investment bank.
So investment bank have their compensation anyway for their agreed risk until the initial public offering IPO process finish.
underwriting 2: compensation
Compensation are the benefits the investment bank got from helping the industry to grow and go public.
Let’s say the company shares is 12 dollars worth it doesn’t mean investment bank simply place or set any price.
They always bought the shares at discount price from the companies.
To make clear, let’s say the investment bank bought the each share for 10 dollars.
When they sell the share they will make 2 dollars profits in each shares. If industry issue 1 millions shares at the beginning.
By selling this all shares, investment bank would make 2 millions Dollars in commissions alone in the entire worth of 12 millions Dollars shares of stocks.
Instead if the investment company failed to sold all the shares and once some other person helping to sold their unsold shares of stock
Which means the person or institution who sold the unsold shares. Would make some deal with investment bank on their benefits of compensation.
For example, if you sold all the issued shares instead of the investment bank.
And investment bank have deal with you to provide 1.5 dollars for each shares you sold.
Which means
Share is worth= $12
Investment bank bought =$10
Investment bank compensation = $0.50
Investment bank compensation for You on Every share= $1.5
Or if investment bank alone sold
Share is worth= $12
Investment bank bought =$10
Investment compensation = $2
This is how the compensation made on the investment bank, but when did certain industry have more shares and contain bigger risk.
Then they would form as a syndicate to finish this whole process.
underwriting 3: syndicate
Syndicate form investment bank together to take underwriting for the same companies by dividing the risk equally among them.
Assume if Companies issue 100 millions shares instead for 1 millions shares.
One investment bank can’t take full responsibility and sell all the shares.
The risk is also very high when one investment bank take whole things. So they won’t.
By dividing the shares equally and taking the risk with syndication where they can handle with loss.
Which helps the big $1 billions worth industries shares to sold easily using syndication.
Even as a syndicate, most of them not aware of what each investment bank risk tolerance would be.
underwriting 4: Risk tolerance
Risk is a things which is taken my investment bank for unsold shares and the challenge of guarantee money to business.
Investment bank have the business shares that are unsold with themselves but not affecting the industry for any reason.
Investment bank bearing with risk they take and try to sell as much shares as possible.
If they can’t about to sell as much as possible shares issued. the unsold share are return to the companies form the investment bank.
So this is how the underwriting are taken over it for each and every companies in the world.
Market rule: #100110
As per the law, the underwriting is market rule and need to be written by all investment bank. So missuses or faking the information of any documents or file strictly punishable by the government.
If your not comfortable or align to use this content with based on market rules please learn about how to regulate your investments under your control with use of Rule investing.