What does the underwriting spread refer to?

The underwriting spread specifically refers to the difference between the price that underwriters pay for the shares from the issuer and the price at which they sell those shares to the public during an initial public offering (IPO). This spread essentially represents the compensation that underwriters receive for taking on the risk of purchasing the shares and for facilitating the offering process.

In this context, underwriters purchase shares at a discount and then sell them at the public offering price, keeping the difference as their profit. Understanding this concept is essential in investment banking, as it reflects the financial mechanics behind the issuance of equities and the role of underwriters in the process.