The shares offered in an Initial Public Offering are priced by negotiation between the underwriters and the issuing company or selling shareholders, as the case may be, and may not reflect the fair market value of the shares. A Secondary Offering refers to the distribution of stock by a company that already has publicly traded securities. The shares offered in a secondary offering are priced by negotiation between the underwriters and the issuing company or selling shareholders, as the case may be. Typically these offerings are priced in close proximity to the last sale price of the security in its principle trading market prior to the pricing terms of the offering being set. When a company decides to make a public offering, it usually hires an investment bank to underwrite the offering.
Underwriters play a very critical role.
First they provide the issuing company with financial advice, and then they buy the shares directly from the company or selling shareholders and resell them to the public. The underwriters are paid for their services from the underwriting spread, or concession, which is the difference between the price paid by the underwriter to the issuer or selling shareholders and the price the underwriter sells the shares to the public. In order to minimize its financial risk, the underwriter may bring in other investment banks and form an underwriting syndicate. The selling group will take indications of interest from potential buyers and distribute the shares. In return, the selling group receives a per share compensation for its efforts.