Underwriting

Definition

Underwriting in plain English

When a company wants to raise money by selling new stock or bonds to the public, it usually hires an investment bank to run the sale — that job is called underwriting. In the classic version, the bank actually BUYS the whole batch of new securities from the company itself, then turns around and resells them to investors, pocketing the difference. That's a real service because the bank guarantees the company gets its cash and takes on the risk that the securities might be hard to sell. Think of a concert promoter who buys every ticket up front from the band, then takes the gamble of filling the seats.

Practice Underwriting

What is the insurer's Combined Ratio, and what does it indicate about their underwriting profitability?

Related Principles of Finance terms

• After-tax cost of debt
• Business risk
• Capital structure
• Cost of preferred equity
• Debt-to-capital ratio
• Debt-to-equity ratio
• Degree of financial leverage (DFL)
• Degree of total leverage (DTL)
• Financial leverage
• Hamada equation