Definition
A financial institution which, in return for a fee or commission, agrees to purchase unsold shares in a new issue, if the issue is not fully subscribed.
From the company's point of view, having its new issue underwritten is a form of insurance. It means that if it has priced an issue too high and the market shuns it, the company can still be sure that it will get money from the new issue.
Of course, security comes at a price. Underwriters charge a fee for the back-up they provide. If the new issue is very popular, it will pocket that fee and make a handsome profit. Occasionally, they get badly burned. New issues underwritten immediately before the 1987 stock market crash lost a lot of money.
Sometimes companies do a rights issue at a deep discount to reduce the underwriting fees.