Definition of underwrite

To guarantee against financial risk by assuming that risk, as financial institutions do when they offer (underwrite) an insurance policy, or when they buy a new securities issue from the issuer for re-sale to the public.

A new securities issue is normally underwritten by a group of investment banks (called the underwriting group or syndicate). One bank, appointed by the group as lead manager, signs the underwriting agreement that specifies all the details of the issuer-underwriter relationship (including pricing), and handles other arrangements including distribution of the issue through dealers or other investment banks (the selling group).

The fee the underwriter earns is the spread (the underwriting spread) between the price it pays the issuer for the stock, and the price at which it re-sells the stock to the public (the issue or public offering price), either directly or through dealers.