Competitive Bid

What is a 'Competitive Bid'

A competitive bid is a step in the initial public offering process whereby an underwriter submits a sealed bid to a company that is making its first issue of stock. After collecting competitive bids from several underwriters, the issuer awards the contract to the underwriter with the best price and contract terms. Competitive bidding is considerably less common than negotiated bidding, the other main method by which issuing companies contract with underwriters. Competitive bidding is more common with municipal bonds issued by utility companies.

BREAKING DOWN 'Competitive Bid'

Underwriting is a crucial step in the IPO process. Underwriters are usually investment banks, and they are responsible for selling the stock of the company that is going public. A firm is more likely to use a negotiated bidding process in selecting an underwriter because it wants to work with a familiar firm (such as the one that managed its venture capital financing) or a firm that has an excellent reputation. In fact, it's common to use several underwriters, called a syndicate, which share the risk of selling the IPO shares.

RELATED TERMS
  1. Underwriting Fees

    Underwriting fees are monies collected by underwriters for performing ...
  2. Underwriting Spread

    The spread between the amount underwriters pay an issuing company ...
  3. Negotiated Sale

    A method of offering municipal bonds or similar financial instruments ...
  4. Underwriter

    An underwriter is a company or other entity that administers ...
  5. Negotiated Underwriting

    A process in which both the purchase price and the offering price ...
  6. Underwriting Risk

    The risk of loss borne by an underwriter. Underwriting risk generally ...
Related Articles
  1. Personal Finance

    What is Underwriting?

    Underwriting is a term most often used in investment banking, insurance and commercial banking. Generally, underwriting means receiving a remuneration for the willingness to pay for or incur ...
  2. Investing

    What is a Greenshoe Option?

    A greenshoe option is a provision in an underwriting agreement that allows the underwriter to buy up to 15% of the shares in an IPO at the offer price.
  3. Investing

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can save or boost their public offering price with these options.
  4. Investing

    What Does an Underwriter Do?

    In the investment world, an underwriter is a company that helps corporations or other issuing bodies distribute their securities.
  5. Trading

    IPO Flippers And The Companies Who Hate Them (TWTR, ETSY)

    Learn how flipping activity affects an initial public offering.
  6. Markets

    Basics Of Federal Bond Issues

    Treasuries are considered the safest investments, but they should still be analyzed when issued.
  7. Investing

    Negotiating the Bid

    A bid is an offer investors make to buy a security.
  8. Managing Wealth

    Top 6 Performing IPOs of 2015 (ONCE, GBT)

    2015 has produced a mixed year for initial public offerings, with small biotechs overcrowding the winner’s list.
  9. Investing

    Brokerage Functions: Underwriting And Agency Roles

    Learning about these various activities can give insight into how securities are issued and traded.
  10. Markets

    What's a T Bond?

    Treasury bonds, or T-bonds, are marketable securities issued by the US government, and are available in increments of $100. Bonds have a maturity range of ten to 30 years, with 30 being the most ...
RELATED FAQS
  1. Do underwriters make guarantees to sell an entire IPO issue?

    Underwriters represent the group of representatives from an investment bank whose main responsibility is to complete the ... Read Answer >>
  2. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  3. What are examples of risks for all underwriter types?

    Learn about the risks faced by different types of underwriting activity. Explore specific examples of risks faced by insurance ... Read Answer >>
  4. How do I become an underwriter?

    Learn about the education, training and certification required to become an insurance underwriter as well as the important ... Read Answer >>
  5. How does insurance underwriting differ from investment underwriting?

    Understand the difference between insurance underwriting and investment underwriting, including what types of risks an underwriter ... Read Answer >>
  6. What is real estate underwriting?

    See how underwriters for major lenders scrutinize real estate loans and manage their risk, and learn the origin of the term ... Read Answer >>
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center