What Is An Underwriter? (Part One)
Underwriters are very common in investment markets especially stock markets and insurance markets although the specific role of the two does differ. In affect an underwriter will take some of the risk from a share issue or other financial transaction in return for a commission (payment).
Stock Market Underwriter
When a company is looking to raise funds for expansion, to secure the future of the company or any other reason, they need to ensure that the money will be raised even if existing shareholders do not take up their entitlements. This is where underwriters will come in and 'underwrite' a number of shares in exchange for a commission. If the fund raising is successful and all shares are taken up by shareholders they will not be forced to buy any shares and walk away with the commission as their profit.
However if not all of the shares are taken up, those remaining they will be acquired by the underwriters (on a pro-rata basis) so that the underlying company is still able to raise the total funds required. The shares will be acquired at the fund raising price and as with the Bradford and Bingley, underwriters could be left with a substantial liability if the share price falls below the cost price. In healthy investment markets it can be money for nothing, but in bad times (as we are seeing now) the liabilities are potentially enormous.
Share this..
Related stories
Emergency Services facing cutbacks
Recent months have seen many announcements of financial woes to impact on the United Kingdom's emergency services. Government spending cuts are bringing about drastic changes in personnel numbers and spending by service leaders and authorities. It is estimated that 3,200 Police officers could be axed if the current stand of introducing compulsory retirement continues. This is in the wake of Pol...
Read MoreBritish Gas Set To Increase Prices By 35%
In a moved which again was not totally unexpected Centrica, the parent company of British Gas, has announced that cost rises will be passed onto British Gas customers in the run up to winter after revealing that profits had fallen by 68% in the six months to June 2008.
Customers who just take gas from British Gas will see their bills rise by 35% and those who take both electricity a...
If Alistair Darling can't read the economy, what chance have we got?
Over the last few weeks there have been more "nods and winks" to economists in the UK than you could count. The UK government was adamant that the UK economy would move out of recession in the third quarter of 2009, something which they believed would be confirmed by yesterday's GDP figures. However, they could not have been more wrong!
The concern now is that if the UK government w...
Car insurance set to rocket in 2009
With news that car insurance premiums rose by 11% in 2008 the AA has put drivers on red alert for a similar rise in 2009. There would appear to be a number of issues which have come into play over the last 12 months and which could continue for some time to come. The average annual premium for comprehensive car insurance increased by 1.3% in the first three months of 2009 and now stands at just ov...
Read MoreAre you planning for your financial future?
In these difficult economic times it can be simply a case of living day-to-day, week to week and month-to-month. However, it is vital that we do not lose sight of the long-term financial future we need to secure for ourselves which includes pensions and savings for later life. While obviously many people are more concerned about their short-term financial situation, with many struggling to cover r...
Read More