Underwriting is defined as the process used by banks to raise money when a company or a government is issuing stocks or bonds.
The term is also used in the insurance industry.
In insurance, the term underwriting refers to the process by which an insurer determines the risk of a client.
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When a company has an initial public offering (IPO), it approaches an investment bank about underwriting the shares of the company. The bank’s job is to pay for those shares and then try to sell them to individual investors for a profit over what was paid to the company.
Underwriting is a very high-value business. When a company goes public, the initial offerings can be worth millions upon millions of dollars. Investments banks make a large profit by underwriting the right companies because they know that private investors will be eager to get their hands on shares of a promising corporation.
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