In investment banking

Investment banking

An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...

, an underwriting contract is a contract between an underwriter and an issuer

Issuer

Issuer is a legal entity that develops, registers and sells securities for the purpose of financing its operations.Issuers may be domestic or foreign governments, corporations or investment trusts...

 of securities

Security (finance)

A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...

.

The following types of underwriting contracts are most common:

• In the firm commitment contract the underwriter guarantees the sale of the issued stock at the agreed-upon price. For the issuer, it is the safest but the most expensive type of the contracts, since the underwriter takes the risk of sale.

• In the best efforts contract the underwriter agrees to sell as many shares as possible at the agreed-upon price.

• Under the all-or-none contract the underwriter agrees either to sell the entire offering or to cancel the deal.

Stand-by underwriting, also known as strict underwriting or old-fashioned underwriting is a form of stock insurance

Insurance

In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

: the issuer contracts the underwriter for the latter to purchase the shares the issuer failed to sell under stockholders' subscription and applications.