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Underwriting Spread

The underwriting spread is the difference between the price at which underwriters purchase securities from an issuing company and the price at which they sell the securities to the public. The spread represents the underwriters’ compensation for taking on the risk of distributing the securities and covers costs such as marketing and administrative expenses. A larger underwriting spread indicates higher compensation for the underwriter.

Example

If an underwriter buys shares from a company at $15 per share and sells them to the public at $18 per share, the underwriting spread is $3, which compensates the underwriter for its services.

Key points

• The difference between the price paid by underwriters to the issuer and the price at which they sell to the public.

• Represents the underwriter’s compensation for the risk and costs of distributing securities.

• A larger spread indicates higher earnings for the underwriter.

Quick Answers to Curious Questions

It compensates the underwriter for the risk and effort involved in selling the securities to the public, covering marketing and distribution costs.

Factors include the risk of the issuance, market conditions, and the size of the offering, with riskier or larger offerings typically commanding higher spreads.

A larger underwriting spread reduces the net proceeds the company receives from the issuance, as the underwriter takes a portion of the funds raised.