What is an underwriter?
When a company chooses to make an initial public offering (IPO), they might employ an IPO underwriter, usually an investment bank.
The role of the IPO underwriter is to make sure the company meets all regulatory requirements, contact potential buyers in the market, and help the company set its share price.
Where have you heard about underwriters?
Large IPOs often get a lot of news coverage, especially if it's an exciting company like Facebook or Alibaba going on to the market for the first time. Often, the amount of money that investment banks make from IPOs is just as interesting to media outlets.
What you need to know about underwriters...
IPO underwriters usually guarantee that they can sell a certain amount of stock during the IPO. If it fails to hit its target, the investment bank has to buy the stock itself.
The IPO underwriter fee is usually a percentage of the amount raised from the IPO, normally ranging from 3-5.5%
Investment banks can make huge amounts of money from underwriting IPOs. In 2014, Goldman Sachs topped the IPO underwriter rankings when it made around £3bn.
However, huge companies can sometimes offer a much lower fee as banks fight for their business.
As of 2016, Alibaba was the largest IPO in history, raising $25bn for the Chinese firm – that's roughly equal to the 2016 GDP of Estonia. However, it's reported that Alibaba paid underwriters just 1% of the total raised.