Introduction
A concession is referred to as the selling groups cutting profit as per the contract associated with the issue of new bonds and stocks.
A concession can also be defined as the difference between the selling price of the securities for investors and the amount the issuing entity receives from the trade. The securities are traded by the issuing company on a per-share of per-bond basis.
Understanding Concession
The contract between the issuing company and the investment bank, also known as an underwriting agreement, includes the underwriter compensation and the management fee apart from the selling concession.
Factors to Consider
When a company/entity decides to issue bonds or stocks to raise capital, an investment bank is hired to work as an underwriter who introduces the new bonds or stocks to the market and facilitates its transactions.
If the securities do not sell, the underwriter may or may not be held responsible depending on the clauses outlined in the underwriting agreement. However, if the securities do sell, the underwriter shall receive compensation accordingly.
In cases where concessions have a vital role in the transaction of the securities, a concession agreement will be signed between the two parties. This agreement will legally bind the transaction taking place between the two parties. Also, all clauses and details with regard to the concessions will be outlined in the concession agreement.
