What it is:
In the securities industry, underwriting fees are the fees earned by an investment bank to help bring a company public or to conduct some other .
In the mortgage business, an underwriting fee is often a fee charged by a mortgage for preparing the and associated paperwork. They are typically a percentage of the loan amount and are paid at closing.
How it works (Example):
When a company decides it wants to underwriter. After determining the structure, the underwriter usually assembles a group of other banks and brokerage firms that commit to sell a certain percentage of the offering., or other publicly traded securities, it hires an
The underwriters then sell the shares to the subscribers at the offering price.
Why it Matters:
Underwriting fees are important because they pay the people who grease the skids for bringing securities to. The fees compensate the and for three things: negotiating and managing the , assuming the risk of buying the securities if nobody else , and managing the of the .
Underwriters work hard to determine the "right" price for an offering, but sometimes they "leave on the table." For example, if XYZ Company prices its 10-million-share IPO at $15 per share but the shares trade at $30 two days after the IPO, this suggests that the underwriter probably underestimated the demand for the issue. As a result, XYZ Company received $150 million (less underwriting fees) when it could have possibly fetched $300 million. In turn, the underwriting fees are lower than they could have been. The knowledge of this consequence is what encourages underwriters to seek the highest price possible for an offering, which also benefits the client's shareholders.