Understanding Concessions: Fees Underwriters Receive Explained
In the world of finance, especially in securities underwriting, the concept of concessions plays a crucial role. This blog will delve deep into what concessions are, how they work, and their significance.
Table of Contents#
- What is a Concession?
- Underwriters and Their Role
- Concession Agreements
- Impact on Underwriter's Profit
What is a Concession?#
A concession, also known as a selling concession, is a form of compensation. It is specifically for an underwriter in a securities underwriting agreement. When a company wants to issue new securities (like stocks or bonds), it doesn't directly sell them to the public. Instead, it relies on underwriters.
Underwriters and Their Role#
Underwriters, which are often investment banks, take on a significant risk. Their job is to distribute these new issues to the public. They have to price the securities correctly, market them, and ensure that there is enough demand. If they over - price, they might not be able to sell all the securities, and if they under - price, the issuer (the company selling the securities) might lose out on potential funds.
Concession Agreements#
Concession agreements are vital in securities underwriting. They outline all the terms related to the concession, including details about the compensation underwriters receive for their services. Both the issuer and the underwriter need to clearly understand the terms. The agreement also covers any risks involved, such as how much the underwriter will be compensated if the securities don't sell as expected.
Impact on Underwriter's Profit#
The concession amount is a key factor in determining the underwriter's profit from selling securities. This fee is paid by the issuer to the underwriter from the underwriting proceeds. If the concession is too low, the underwriter might not be adequately compensated for the risk and effort. If it's too high, it reduces the net proceeds the issuer receives from the offering, though it does not directly determine the issuance price.