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9-4 The Securities Market [CH 9

Underwriting is a guarantee of the worthiness of the issue. This guarantee is
established by the investment banker actually purchasing the entirety of the offering.
Underwriting However, they do not accomplish this alone and they do it for a profit.
guarantee of the worthiness
of the issue. To make their profit, the investment bankers, resell either all or part of the shares
to other underwriters who, in turn, sell them to the public. In the example described
above, the primary underwriter may acquire the issue from Investment bankers agree
to acquire the total issue from the company or agency and then resell it to other

investors.
For the investment bankers’ profit, the issuer sells the issue to the investment
banker at a discount, which will account for their profit and compensate them for
services rendered. For instance, the CLEAN HARBORS 1‑million‑share offering at

$9 per share might be discounted to the underwriter for $8.15 per share. Because
primary underwriters do not typically take complete responsibility for the public sale,
they will resell either all or part of the shares to other underwriters who, in turn, sell
them to the public. Thus, the primary underwriter may in turn sell shares to other

underwriters for $8.60, realizing a 45¢ per share profit. These secondary underwriters
will break the offering into smaller units whereby ultimately the public may be offered
the stock at $9 per share. Figure 9.2 illustrates this process. When the public actually
purchases the shares, an 85¢ per profit per share has been realized by the investment

bankers and underwriters. This 85¢ represents a 9.4 percent profit margin to the
investment banker and underwriters for their services and $850,000 on the stock
offering; Clean Harbors will have received $8,150,000.

Secondary Market—Resell Stocks and Bonds

What is reported daily on news casts and in newspapers about stocks and bond
trading is reporting on the activities of the secondary markets. The secondary market is
where previously issued shares of stocks and bonds are traded. These trades are

between the holders of stocks and bonds, and the issuing company, say Coca-Cola, do
not receive proceeds from such transactions. Any gains and losses in this market only
affect the current or future owners of these securities.

Figure 9.3 Clean Harbors Common Stock Certificate
State in which the Name of Corporation
company is incorporated Type of Stock issuing the stock

100

Name and
address of the Par Value of
stock’s the stock is
registered $.01 per share
owner

Corporate officers

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