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Securities Underwriting

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Securities Underwriting Career Overview: Investment bankers engaged in securities underwriting raise capital for corporations through the structuring and sale of securities such as bonds and stocks. Municipal finance is securities underwriting (strictly bonds) on behalf of government entities such as states, counties, municipalities and public authorities.

Underwriting syndicate: If investment bankers from more than one firm join forces to engage in a specific securities underwriting effort, they are collectively referred to as an underwriting syndicate. The larger the stock or bond issue is, in terms of dollars to be raised, the larger the underwriting syndicate is bound to be.

Public offering: When investment bankers engage in securities underwriting for sale to the general public, the deal typically is called a public offering.

Private placements: In some situations, investment bankers structure deals in which the securities are sold strictly to institutional investors, such as pension funds and private equity funds, and not to the general public. Securities underwriting of this sort is typically called a private placement.

Best efforts: In best efforts deals, the investment bankers make no guarantees to the issuing firm regarding the quantity of securities that will be sold or the price thereof. In this securities underwriting scenario, the risk associated with unsold or overpriced securities falls strictly on the issuing company or government entity.

Firm commitments: In firm commitments deals, the investment bankers do make guarantees to the issuing company or government entity regarding the amount of funds that will be raised through the securities underwriting. The risk associated with any unsold or overpriced securities is borne by the investment bankers.

Underwriting fee: The investment bankers earn a fee for advising the client, structuring the securities underwriting, and assuming risk. The portion of the underwriting fee that compensates for risk will be higher in firm commitments deals than in best efforts deal. The underwriting fee is deducted from the proceeds of the securities underwriting, reducing the net amount raised by the issuing company or government entity.

Selling syndicate: If multiple financial services firms join forces to sell the product of a securities underwriting to investors, they are collectively referred to as a selling syndicate. The larger the stock or bond issue is, in terms of dollars to be raised, the larger the selling syndicate is bound to be. In most deals, investment bankers typically rely heavily on sales to retail clients (individual clients) through Financial Advisors working for firms in the selling syndicate.

Selling concession: The investment bankers compensate members of the selling syndicate through payment of a selling concession, which is a species of sales commission. The selling concession is deducted from the proceeds of the securities underwriting, reducing the net amount raised by the issuing company or government entity.

Underwriting discount, underwriting fee, underwriting commission: Many prospectuses for bond issues and new stock issues do not show the underwriting fees and the selling concessions separately. Instead, they tend to lump them together under blanket terms like these. Depending on the specifics of the deal, it is not unusual for these fees to total around 4% of the total raised by the securities underwriting. At the other end of the spectrum, in cases where a major financial services firm is acting as sole underwriter and seller of a debt issue (usually when it is raising funds solely for its own operations from its own clients), these fees can be under 1%.

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