What is an IPO underwriting?

An initial public offering (IPO) underwriting is the process by which a company raises capital from the public by issuing new shares of stock. The company typically hires an investment bank or underwriting firm to help it with the IPO process, including setting a price for the shares and selling them to investors.

How does an IPO underwriting work?

let's say that XYZ Corporation is a privately held company that wants to go public and raise capital by selling shares of stock to the public. XYZ hires an underwriting firm to help it with the IPO process. The underwriting firm will work with XYZ to determine the appropriate price for the shares and then create a prospectus, which is a document that provides detailed information about the company and the offering to potential investors.

Once the prospectus is complete, the underwriting firm will begin selling the shares to investors, such as institutions and individual investors. The underwriting firm will typically guarantee to purchase any unsold shares from XYZ at the offering price, which helps to ensure that the IPO is successful. This is known as a "firm commitment" underwriting.

In some cases, the underwriting firm may instead offer to purchase a certain number of shares at the offering price and then try to sell the remaining shares to investors on a best-efforts basis. This is known as a "best-efforts" underwriting.

Conclusion

Overall, the IPO underwriting process helps companies to raise capital by issuing new shares of stock and provides investors with an opportunity to purchase a stake in the company.