hello friends welcome to this
investment-banking tutorial from wallstreetmojo
let us now look at the overall framework we have learned what
is research we have looked at sales in
trading we have also looked at raising
capital now we will move to underwriting
and market making these are basically
two industries jargons which are very
important for us to understand now when
we talk about IPO user what happens is
let say if the company is wanting to
raise up $100 million and if they are unable to do so then what happens
there's a risk associated with it where
we probably assume that the IPO may go
unsuccessful to mitigate the risk
investment banks actually underwrite an
IPO which means that if there is an
under subscription then investment banks
will actually buy those shares
now let us discuss another important
function of an investment bank when we
talk about IPOs that is called as
underwriting so we have been hearing a
lot about investment banks doing
underwriting for various IPOs what
exactly it means so let's take an
example here in order to see what
underwriting means let's see that you
know there's a small company that is a
private company and that they want to
kind of raise new securities so we have
discussed this earlier they may raise
using an IPO or the initial public
offerings but the problem is that you
know there may be a risk associated with
under subscription what this under
subscription would mean is let's say
this company wanted to raise $100
million from the market the risk
of under subscription means that
whatever they wanted to raise they may
not be able to raise so not 100 million
maybe they are able to raise 50 million
that's under subscription you know there
are investment bankers who basically
underwrite the securities and help the
firms raise the committed amount so what
this means is that if an investment
banker is underwriting these securities
he is virtually guaranteeing that the
amount that is hundred is committed to
be raised will be raised and how does
the investment bank actually ensures
this so essentially when when the IPO
actually comes so the stocks are given
to the investors and let's say if there
is under subscription of any kind let's
say to an extent of for $10 million
so these $10 million
worth of stocks will be absorbed by the
investment bank so we are essentially
saying that the investment bank will
actually buy this shares and sell that
at an appropriate time in order to make
a profit so underwriting means that
essentially you're guaranteeing that any
amount of under subscription will be
absorbed by the investment bank and
obviously as you can see that the
investment bank is assuming a financial
risk the financial risk could be that
let's say if the IPO was not successful
so the investment bank may have to buy
the stock to an extent it was under subscribed
and let's say the stocks stang after some time so that's a huge risk
for an investment bank so that's why
when we talk about underwriting in
western max actually charge a hefty fees
during the underwriting scenarios and in
this process they have to actually talk
in detail with the risk Department
as well as the compliance Department
about the amount of risk or the quantum
of risk that the investment bank can
take with respect to underwriting so
with this we have understood
underwriting as one of the most
important functions
