What is 'Underwriting Spread'

The underwriting spread is the spread between the dollar amount that underwriters pay an issuing company for its securities and the dollar amount that underwriters receive from selling the securities in the public offering. The underwriting spread is the underwriter's gross profit margin, usually expressed in points per unit of sale.

BREAKING DOWN 'Underwriting Spread'

Underwriting spreads may vary widely and are influenced by the underwriter's expectation of market demand for the securities offered for sale, interest rates and other factors. The size of the underwriting spread depends on the negotiations and competitive bidding among members of an underwriter syndicate and the issuing company itself. The spread increases as the risks involved with the issuance increase.

The underwriting spread in an initial public offering (IPO) typically includes the following components: the manager's fee, the underwriting fee (earned by members of the underwriter syndicate), and the concession, which is earned by the broker-dealer selling the shares. The manager is entitled to the entire underwriting spread. Each member of the underwriting syndicate gets a (not necessarily equal) share of the underwriting fee and the concession. A broker-dealer, who is not a member of the underwriter syndicate, but sells shares, receives only a share of the concession. The member of the underwriter syndicate that provides the shares to that broker dealer would retain the underwriting fee.

Proportionately, the concession increases as total underwriting fees rise. Meanwhile, the management and underwriting fees decrease with gross underwriting fees. The effect of size on the division of fees is usually due to differential economies of scale. The extent of investment banker work, for example, in writing the prospectus and preparing the roadshow is somewhat fixed, while the amount of sales work is not. Larger deals will not involve exponentially more investment banker work, but it might involve much more sales effort, requiring an increase in the proportion of the selling concession. Alternatively, junior banks may join a syndicate, even if they receive a smaller share of the fees in the form of a lower selling concession.

Example of Underwriting Spread

To illustrate an underwriting spread, consider a company that receives $36 per share from the underwriter for its shares. If the underwriters turn around and sell the stock to the public at $38 per share, the underwriting spread would be $2 per share. The value of the underwriting spread can be influenced by variables such as the size of the issue, risk and volatility.

 

RELATED TERMS
  1. Underwriting Fees

    Underwriting fees are monies collected by underwriters for underwriting ...
  2. Lead Underwriter

    A lead underwriter is usually an investment bank that organizes ...
  3. Underwriting

    Underwriting is the acceptance of a specific transaction's risk ...
  4. Standby Underwriting

    Standby underwriting is an IPO sales agreement in which the underwriter ...
  5. Breaking The Syndicate

    Breaking the syndicate refers to the dissolution of a group of ...
  6. Selling Group

    A selling group comprises all financial institutions involved ...
Related Articles
  1. Insurance

    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. Insurance

    Accelerated Underwriting Makes Life Insurance Easy

    A new development called “accelerated underwriting” is making it faster and easier for people to obtain life insurance.
  3. Insurance

    Common Life Insurance Questions Answered

    Choosing life insurance can seem daunting at first. Here are answers to commonly asked questions.
  4. Insurance

    The Rise Of The Modern Investment Bank

    Get to know a little bit about the institutions whose actions help to guide free markets.
  5. Investing

    What's the Difference Between an IPO and a Direct Listing?g?

    These are the key differences between an initial public offering and a direct listing of shares
  6. Insurance

    Answers to High-Risk Life Insurance Questions

    Do you have questions about obtaining life insurance if you are considered higher risk?
  7. Investing

    AMC Prices Secondary at $31.50, Shares Fall

    AMC Entertainment priced at secondary offering at 31.50
  8. Insurance

    Brokerage Functions: Underwriting And Agency Roles

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

    Basics Of Federal Bond Issues

    Treasuries are considered the safest investments, but they should still be analyzed when issued.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. How is something "brought over the wall" in an investment bank?

    An analyst who lends his or her expertise to an underwriting department is said to have been "brought over the wall". In ... Read Answer >>
  5. What is the difference between an IPO and a seasoned issue?

    Learn how companies issue IPO securities when they first go public and seasoned issue shares if they sell more shares in ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center