Underwriting is a process generally takes place in initial public offerings (IPO). The underwriter to an IPO guarantees payment in case of damage or financial loss to the share issuing company. The under writer may accept financial risk for liability either on firm commitment or best effort basis. Here best efforts means that the underwriters are only committing their best efforts to sell the shares during issue of IPO, whereas in firm commitments, the underwriters pledges to buy all the unsold shares in an issue. The underwriters will purchase the shares at a discount of usually around 5 to 7% and resell them for the full public offering price to institutional and individual investors.
The other type of underwriter is a person working in an insurance Company. The underwriter of an insurance Company evaluates and decides the amount of damage to be paid by the insurance company to the claimant.
An investment bank is a financial institution that provides several finance-related and other services to individuals, corporations, and governments such as raising financial capital by underwriting or acting as the client’s agent in the issuance of securities. An investment bank may also assist companies involved in merger and acquisition (M&A) and provide ancillary services such as trading of derivatives and equity securities, and FICC (fixed income instruments, Currencies, and commodities) services. Some investment banks exclusively dealing to raise funds for businesses or governments by registering and issuing debt or equity and selling it on a market and they do not involve in activities of commercial banks.
An investment banker can also perform the functions of underwriters so we can say that underwriters are part of investment banking.