Hard underwriting

Welcome to our lesson on finance related terms. Today, we will be discussing the concept of underwriting and its two types: hard and soft. Underwriting is a crucial process in the issuance of securities, where an underwriter agrees to buy a certain amount of the securities from the issuer.

In hard underwriting, the underwriter takes on a significant risk by guaranteeing a fixed amount to the issuer from the issue. This means that if the securities are not fully subscribed by investors, the underwriter is obligated to purchase the remaining amount. This ensures that the issuer receives the necessary funds from the issue.

In contrast, soft underwriting involves a lower risk for the underwriter. Here, the underwriter only agrees to buy the securities from the issuer if they are not fully subscribed by investors. This type of underwriting is more common in larger issues, where the underwriter may not be able to commit to purchasing the entire amount.