What is Equity Underwriting?
Underwriting services are offered by large financial institutions, like banks, insurance companies, or other investment houses, where they are supposed to guarantee payments in the case of any financial loss. The underwriter’s role here is to accept the financial risk when the party defaults.
Therefore, underwriting services are considered intermediary-related services, which help to establish a bridge between the organization selling securities and the one purchasing.
It is supposed to act as a guarantee on behalf of the purchaser of security that in the case where there is an unprecedented financial loss, the underwriter is going to cover the stated loss.
Equity underwriting, also called security underwriting, is the process where investment banks work to raise investment from investors on behalf of corporations and governments that are issuing these securities.
Underwriting services are mostly part and parcel of a public offering in a primary market. Security underwriting is considered a way of distributing newly issued security to investors. In this regard, a syndicate of banks is supposed to underwrite the transaction.
When they do that, this implies that the underwriter has undertaken a risk assessment, hence taking the risk and responsibility of distributing the securities.
If the underwriters cannot find enough investors, they will keep some of the securities to themselves.
What do equity underwriters mostly do?
Underwriting is considered to be an activity directed toward risk minimization. In this regard, it is important to realize that underwriters are mainly responsible for ensuring that they can analyze the risk profile of the underlying asset, based on which they can subsequently give their assessment (or guarantee).
In the case of equity underwriters, there is quite a wider ground that needs to be covered to ensure that they can take guarantee with reasonable assurance. Therefore, equity underwriters are supposed to cover the following aspects:
- Risk Assessment: This is the primitive feature of equity underwriters. They are supposed to determine the level of risk involved in the party issuing the bonds themselves. They need to check for assets and liabilities to get an idea regarding how much to pay back the amount raised in the form of security.
- Evaluation of financial position: To draw a comparison between the company and its counterparts, is also considered an important aspect for underwriters because it helps them get an idea of the company’s past performance. Having an idea about the company’s track record helps underwriters gauge if it would be an attractive investment option from the investors’ perspective.
- Future outlook of the company: The company’s future outlook also tends to be an important factor in gauging the business’s future performance. In the case where the future outlook of the company tends to be shaky, the underwriters can set the price of the equity accordingly. Projections and futuristic estimates of the company tend to behave a very significant impact on the overall equity that is sold across various positions.
Therefore, it can be seen that equity underwriters are entrusted with the responsibility not only to consider the company’s current position but also to look at future outcomes based on which they can estimate the existing level of risk involved within the company.
The risk assessment might require an extensive study of the company’s assets so that the company is not improperly valued. The issued equity’s valuation should reflect the actual financial position of the business.
Since the underwriter takes a guarantee on the company’s part, the underwriters need to maintain a much-needed level of professional skepticism that can help them reduce their risk to a reasonable level.
In the case of IPOs, the underwriter’s role further amplifies, because they need to create an offering that works for both the investors and the company itself.
The responsibility, in this case, is considerable, and hence, should cover substantial ground that can form the basis for an investment that renders positive returns for the shareholders for a considerable time frame.
How to become an equity underwriter?
There is no doubt that equity underwriting tends to be a very important element in the case of companies that are either seeking to expand their operations or that need to look forward to an IPO (Initial Public Offering).
For all the cases where equity is involved within a company, the underwriter’s role tends to be highly important.
Hence, this particular field of action is relatively high in demand, and therefore, numerous individuals now aspire to establish their careers as equity underwriters.
Becoming an equity underwriter does not have a stringent requirement or a trajectory. However, several factors must be accounted for when establishing a career as an equity underwriter.
- Enrolling in an undergraduate program: This tends to be the primitive course of action because it helps to get a basic idea regarding the field of business, and the basic principles of business, per se. Once individuals can get a holistic idea regarding business operations, they can get the basic skill set required for analyzing business situations.
- Getting an Internship: Getting professional experience and exposure is also important because it helps develop practical hindsight about how theoretical practice varies from real-life cases and scenarios. Hence, this would also enable the aspiring underwriters to get a closer look into the field, and if this field is something they would want to take up in the future. In the case where specific internships as equity underwriters are not available, in that case, an internship that is even remotely connected to either equity or underwriting can be joined to get an idea regarding the field itself.
- Professional Qualifications: Professional qualifications and certifications also tend to be important to ensure that a specific skill set is crafted around the field of accounting and finance. This will also help the company get a broader idea regarding the basics of accounting, finance, and quantitative analysis. Examples of these professional qualifications include CPA, as well as ACCA.
- Certifications and Training: With a field like underwriting, it can be seen that the best form of training that can be achieved is mainly on-the-job training. Therefore, it is important to consider that certifications and training are important because they help build a greater understanding of the field itself. This helps to stay relevant in the field and continue to build expertise around this subject matter.
Therefore, it can be seen that being regarded as an equity underwriter is not a hard task. It just requires constant upgradation of skills that helps underwriters to develop the skill that can help them climb the ladder of professional success.
Getting into a brokerage house, or a Stock Exchange might prove to be additionally resourceful for individuals seeking to establish a career as an equity underwriter.
