Underwriting

Underwriters may be found working with IPOs, initial public offerings. In this case underwriters measure an investment's risk to decide on the right price for an IPO as well as to buy and sell securities.

One of the core functions in investment banking is to serve as the middleman between companies (i.e. the clients) that want to issue new securities and the general public.

In particular, the two types of capital sources that investment banks can help their clients raise are equity and debt securities:

1. Equity Securities Underwriting→ The corporation raises capital by issuing shares in itself to the general public.
2. Debt Securities Underwriting→ The corporation raises capital by issuing debt securities, which are contractual obligations to pay periodic interest over the course of the borrowing, as well as the repayment of the debt principal in full at maturity.

The investment bank then determines the value and riskiness of the business to price, underwrite, and then sell the new securities.

When an investment bank underwrites stock or bond issues, it also ensures that the buying public commits to purchasing stocks or bonds before it actually hits the market.

In this sense, investment banks are intermediaries between the issuers of securities and the investing public.