Investment banks can take a financial loss when new issues of stocks t

QUESTION

Investment banks can take a financial loss when new issues of stocks they purchase are sold to investors at a lower price. How can they decrease their risk?

What will be an ideal response?

ANSWER

Answer: Investment banks can form a syndicate to purchase and sell a particular stock issue. Rather than one bank buying and selling all of the new issue of securities and assuming all the risk, a syndicate spreads the risk among the various participating banks.
Explanation: To limit the risk of underwriting a particular securities issue, investment banks can form a syndicate. All banks in the syndicate buy and sell the new issue of the security, sharing the potential risk (and rewards).