Underwriting is a process that involves undertaking a financial risk by an institution on behalf of a third party in respect of investments. For this, the financial institution may charge a premium for it. This will involve greater research about the applicant and the risk profile that has been brought to the institution. It often helps the investors to get fair terms on loans when an investment opportunity has an underwriting of a repute financial institution.
Underwriting is also involved in the process of IPO for companies going public, where the underwriter takes a fee against an assurance that the whole share capital will be raised. Which the underwriting firm will have to compensate the company if the IPO is not fully subscribed.
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