Standby Underwriting (Standby)

AAA

DEFINITION of 'Standby Underwriting (Standby)'

A type of agreement to sell shares in an initial public offering (IPO) in which the underwriting investment bank agrees to purchase whatever shares remain after it has sold all of the shares it can to the public. In an underwriting standby (standby) agreement, the underwriter agrees to purchase any remaining shares at the subscription price, which is lower than the stock's market price. This underwriting method guarantees the issuing company that its IPO will raise a certain amount of money.

BREAKING DOWN 'Standby Underwriting (Standby)'

Although the ability to buy shares below the market price may appear to be an advantage of standby underwriting, the fact that there are shares left over for the underwriter to purchase indicates a lack of demand. Standby underwriting thus transfers risk from the company that is going public (the issuer) to the investment bank (the underwriter). Because of this additional risk, the underwriter's fee may be higher. Other options for underwriting an IPO include a firm commitment and a best efforts agreement.

RELATED TERMS
  1. Investment Bank - IB

    A financial intermediary that performs a variety of services. ...
  2. New Issue

    A reference to a security that has been registered, issued and ...
  3. Issuer

    A legal entity that develops, registers and sells securities ...
  4. Underwriting

    1. The process by which investment bankers raise investment capital ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  6. Best Efforts

    An agreement in which an underwriter promises to make a full-fledged ...
Related Articles
  1. Brokers

    Brokerage Functions: Underwriting And Agency Roles

    Learning about these various activities can give insight into how securities are issued and traded.
  2. Investing Basics

    A Look At Primary And Secondary Markets

    Knowing how the primary and secondary markets work is key to understanding how stocks trade.
  3. Investing Basics

    5 Tips For Investing In IPOs

    Thinking of investing in IPOs? Here are five things to remember before jumping into these murky waters.
  4. Brokers

    Uncovering The Securities Firm

    Learn about the various departments of a securities firm and the professionals who make it work.
  5. Retirement

    IPO Basics Tutorial

    What's an IPO, and how did everybody get so rich off them during the dotcom boom? We give you the scoop.
  6. Investing Basics

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  7. Stock Analysis

    6 Things to Know About Soul Cycle Stock

    Learn about SoulCycle and how it has found success. Understand six aspects of the company everyone should know before considering an investment in SoulCycle.
  8. Stock Analysis

    5 Things to Know About Neiman Marcus Stock

    Learn about Nieman Marcus and how it has become successful. Understand five aspects potential investors should know about the company.
  9. Stock Analysis

    5 Things to Know About Planet Fitness Stock

    Learn about Planet Fitness and how it has achieved success. Understand five aspects of the company that have made it an attractive investment.
  10. Stock Analysis

    Is the Apple Watch a Real Threat to Fitbit?

    Examine the potential for marketplace competition between Fitbit and the Apple Watch in the rapidly growing consumer wearables industry.
RELATED FAQS
  1. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>
  2. Why would a company decide to utilize H-shares over A-shares in its IPO?

    A company would decide to utilize H shares over A shares in its initial public offering (IPO) if that company believes it ... Read Full Answer >>
  3. How do I place a buy limit order if I want to buy a stock during an initial public ...

    During an initial public offering, or IPO, a trader may place a buy limit order by choosing "Buy" and "Limit" in the order ... Read Full Answer >>
  4. How do corporate actions affect floating stock?

    Corporate actions, defined as a company's actions that affect the amount of outstanding company stock shares, can either ... Read Full Answer >>
  5. What are the advantages and disadvantages of listing on the Nasdaq versus other stock ...

    The primary advantages for a company of listing on the Nasdaq exchange are lower listing fees and lower minimum requirements ... Read Full Answer >>
  6. What securities does the primary market deal with?

    The primary market deals with all newly issued securities. When businesses, governments or other groups want to raise capital ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  2. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  3. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  4. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  5. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
  6. Wedding Warrant

    A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is surrendered. Until the call ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!