Insurance: to assume risk in exchange for a premium.

Investments: to assume the risk of buying a new issue of securities from the issuing corporation or government entity and reselling them to the public, either directly or through dealers. The underwriter makes a profit on the difference between the price paid to the issuer and the public offering price, called the underwriting spread.

Underwriting is the business of investment bankers, who usually form an underwriting group (also called a purchase group or syndicate) to pool the risk and assure successful distribution of the issue. The syndicate operates under an agreement among underwriters, also termed a syndicate contract or purchase group contract.

The underwriting group appoints a managing underwriter, also known as lead underwriter, syndicate manager, or simply manager, that is usually the originating investment banker-the firm that began working with the issuer months before to plan details of the issue and prepare the registration materials to be filed with the Securities and Exchange Commission. The manager, acting as agent for the group, signs the underwriting agreement (or purchase contract) with the issuer. This agreement sets forth the terms and conditions of the arrangement and the responsibilities of both issuer and underwriter. During the offering period, it is the manager's responsibility to stabilize the market price of the issuer's shares by bidding in the open market, a process called pegging. The manager may also appoint a selling group, comprised of dealers and the underwriters themselves, to assist in distribution of the issue.

Strictly speaking, underwrite is properly used only in a firm commitment underwriting, also known as a bought deal, where the securities are purchased outright from the issuer.

Other investment banking arrangements to which the term is sometimes loosely applied are best effort, All Or None, and standby commitments; in each of these, the risk is shared between the issuer and the investment banker.

The term is also sometimes used in connection with a registered secondary offering, which involves essentially the same process as a new issue, except that the proceeds go to the selling investor, not to the issuer. For these arrangements, the term secondary offering or secondary distribution is preferable to underwriting, which is usually reserved for new, or primary, distributions.

There are two basic methods by which underwriters are chosen by issuers and underwriting spreads are determined: negotiated underwritings and competitive bid underwritings. Generally, the negotiated method is used in corporate equity (stock) issues and most corporate debt (bond) issues, whereas the competitive bidding method is used by municipalities and public utilities.