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

Suppose ABC Corporation wants to expand its widget-making business, and needs funds. It decides to issue an initial public offering to raise the money. ABC hires an investment bank to be the underwriter for its IPO. The investment bank and ABC together determine how much money they believe the IPO will raise, how much the bank will be paid in fees and profits, and other details.

ABC and the investment bank file a statement with the SEC to register the IPO. After the SEC reviews the application to make sure all necessary information has been submitted, it works with ABC to set a sale date. The investment bank buys ABC’s shares to fund the IPO. The bank profits when it sells the shares through its distribution network at a higher price.

Underwriters assume the risk of managing and selling the shares. They must be thorough when setting prices. If they underestimate the public’s interest in the offering, they leave money on the table. If they overestimate, they may be stuck keeping the shares or selling them for a lower price.

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