An investment bank is a financial institution that assists individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services.
In the world today there are many differing types of investments that can be made. Consequently, investment banks have propped up everywhere to help consumers to make wise monetary choices and provide the services they need. But like consumers themselves, investment banks often times make investments of their own. This most commonly comes in the form of an underwriter syndicate.
Underwriter syndicates are, simply put, a temporary group of investment banks or broker-dealers who gather together as one force to offer a new set of equity or debt securities to investors on the market. These unified forces are led by a lead underwriter, and investment banks and broker-dealers usually come together to form such syndicates in the event when an issue is too large for a single firm to handle.
All parties involved in this syndicate are compensated for their services with the use of an "underwriting spread", which is the difference between the price paid to the issuer and the price received from investors or brokers.
This type of group between investment banks and brokers can also be referred upon their common aliases of an "underwriting group", a "banking syndicate", or an "investment banking syndicate".
In the markets of the modern day, current economic conditions throughout the world have resulted in increased risks for investors and brokers alike. With the inclusion of a variety of methods, underwriter syndicates are one of the most well known ways of reducing risks to a party when attempting to make a complex trade or systems of trades.
This decreased risk, which results in increased security, is achieved in an investment banking syndicate by mitigating the risk involved to every party that has come together to form the syndicate itself. All investment banks or brokers involved equally share the risks of the venture they are about to take. Consequently, this allows for the prevention of a full scale disaster in the case of failure in any market trade. As each party involved within the unified syndicate puts up a certain amount of their capital to eliminate (in the case of failure) a bad market venture, this results in each member also being able to retain most of their original investments also.
Although speculation may be a dangerous aspect to be involved in, the dangers are greatly mitigated through the increased security an underwriting syndicate can offer.
Even though each member of a syndicate shares the burden or success equally, the lead underwriter of the group is more equal than others. In the event of success or failure, the lead underwriter will take charge in leading the syndicate to conform to the situation at hand. Unsurprisingly, whoever takes this leading role will also find themselves accruing just a larger share of the profits from spread and fees.
Underwriting syndicates between investment banks and brokers are a common day occurrence in our modern day economic lives. With the security a syndicate brings, the economy is able to effectively function and make international trading decisions with decreased risk and more flexibility.
Financial education is so important, but barely taught at all in our schools. Having resources online is great, but not if they are inaccessible to so many. Thanks 508!