Volatility

Investment bankers act as intermediaries between individuals with funds to invest and firms in need of financing. They guarantee the sale of securities and commit to raising a specified amount of money. The underwriters buy the securities with the intention to sell them to the general public. If they fail to sell all the securities, they bear the losses. The originating house manages the underwriting process and forms a syndicate with other brokerage houses to increase potential buyers and reduce individual risk. Best efforts sales are used for small issues of risky securities. Pricing is crucial in underwriting as an initial offer price that is too high may hinder sales. Investment bankers have choices of maintaining offer price or letting market find a lower price level. Supporting offer price ties up their own funds or requires borrowing funds which decreases profit margin.