Definition of Underwriting

Underwritting is the process of marketing a new issue of securities to the investing public. A broker dealer forwards the proceeds of the sale to the issuer minus their fee for selling the securities.

Applying "Underwriting" to Securities Exams:

When an issuer of securities wants to raise money by selling securities to the public they will hire a broker dealer to market the securities for them. During the underwriting process the broker dealer or group of broker dealers will purchase the securities from the issuer and resell the securities to investors. The underwriter or the underwriting syndicate will purchase the securities at a discount from the issuer and resell them at the public offering price to investors. This discount is known as the underwriting spread and is the compensation paid to the underwriters for selling the securities.

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