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 role of the underwriter here is to accept the financial risk in the case where the party defaults.
Therefore, underwriting services are considered to be intermediary-related services, which help to establish a bridge between the organization selling securities, as well as the one purchasing.
It is supposed to act as a guarantee on the 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 referred to as security underwriting, is referred to as the process where investment banks work in order to raise investment from investors on the behalf of corporations as well as 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, and hence taken the risk and responsibility of distributing the securities. In the case where the underwriters are unable to 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 towards risk minimization. In this regard, it is important to realize the fact that underwriters are mainly responsible for ensuring that they are able to 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 in order to ensure that they can take guarantee with a 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 that is issuing the bonds themselves. They need to check for assets, as well as liabilities so that they are able to get an idea regarding the extent to which they can pay back the amount that has been raised in the form of security.
- Evaluation of financial position: Evaluating financial position, in order to draw a comparison between the company and its counterparts is also considered to be an important aspect for underwriters because it helps them get an idea regarding the performance of the company in the past. Having an idea about the track record of the company helps underwriters to gauge if it would be an attractive option to invest in from the perspective of investors.
- Future outlook of the company: The future outlook of the company also tends to be an important factor in terms of gauging the future performance of the business. 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 different positions.
Therefore, it can be seen that equity underwriters are entrusted with the responsibility to not only consider the current position of the company, but also look at future outcomes based on which they can estimate the existing level of risk that is involved within the company.
The risk assessment might require an extensive study of the assets of the company so that the company is not improperly valued. The valuation of the issued equity should be reflective of the actual financial position of the business.
Since the underwriter takes a guarantee on the part of the company, it is essential for the underwriters to maintain a much-needed level of professional skepticism that can help them reduce their own risk to a reasonable level.
In the case of IPOs, the role of underwriter further amplifies, because they need to create an offering that works for both, the investors, as well as 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 to the fact that equity underwriting tends to be a very important element in case of companies that are either seeking to expand their operations, or companies that need to look forward to an IPO (Initial Public Offering).
For all the cases where equity is involved within a company, the role of the underwriter tends to be a highly important one. Hence, this particular field of action is relatively high in demand, and therefore, there are numerous individuals who now aspire to establish their careers as equity underwriters.
Becoming an equity underwriter does not have a stringent requirement or a trajectory. However, there are several different factors that need to 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 are able to 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 an important element because it helps to 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 as well. In the case where specific internships as an equity underwriter are not available, in that case, an internship that is even remotely connected to either equity or underwriting can be joined in order to get an idea regarding the field itself.
- Professional Qualifications: Professional qualifications and certifications also tend to be important in order to ensure that a specific skillset is crafted around the field of accounting and finance. This is also going to 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 the fact that certifications and training are important because they help to 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 really a hard task. It just requires constant upgradation of skills that helps underwriters to develop their 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.