In this paper we will define IPO underwriter and describe the role of it. A company may either sell its stock by itself or go to an IPO underwriter.
Mainly the investment banks play the role of underwriter. An IPO candidate should have a clear understanding about the terms and commitments given by the underwriter.
Those who look after the pricing, positioning and marketing of a company’s initial public offering is termed as underwriter in Economics.
Mainly the investment banks are used to play the role of underwriter. The roll of an IPO underwriter is very important behind the success of that company’s public issue.
An individual who will go for an IPO ought to understand the several contracts, terms and commitments given by the underwriters.
The way of issuing the insurance policies is called underwriting, that is, the process through which the investment bankers collect capital for investment from public on behalf of the governments and the company.
An IPO underwriter can be thought of a middle man who plays between the public who go for IPO and the company.
The new issues are mainly introduced in the market by the IPO underwriters, although the company itself can do this.
IPO Valuation Model
Therefore, the public have to take the risk while going for an IPO.
The underwriting agreements usually are divided into two parts: one is firm commitment and the other is best efforts. Under the former agreement, the underwriters promise to purchase all the IPO stocks and then sell them to the public. While, “best effort” signifies that the underwriters will put their best effort up to sell the stocks.
Usually, from their respective issuing clients the underwriters get the underwriting fees but, sometimes, they can make profit as well by selling the underwritten shares to the public.
However, the IPO underwriters take the burden of circulating the securities issue to the investors.
More Information on IPO