What Does Gross Spread Mean?

by Investing School on December 29, 2010

The term “gross spread” makes reference to the difference between the underwriting price received by a stock’s issuing company, and the real price at which the stock is placed on the market.

Underwriters make their money through charging the public a higher price for an IPO or “initial public offering” than the amount they paid to the issuing company. This is the way that the underwriters earn a profit. That monetary difference between the price paid by the underwriter and the offering price that they charge to the general public is the compensation that the underwriters take in for their efforts. Because of this, the gross spread is also sometimes known as “underwriting spread.”

The gross spread will be determined for each stock, and varies according to several different variables. These may include the number of issued stocks, the risk involved in the endeavor, the total volatility in the price of the security, etc. The average amount of the gross spread will usually comprise about 7% of the total cost.

For an example, consider the possibility that a stock is to be offered for sale to the public at $20 per share. In that case, the underwriters could wind up paying the issuing company somewhere in the neighborhood of $18.60 per share (again, note the 7% difference between the two prices). This may not seem like a lot of money, but when the underwriter has millions of shares being sold, that $1.40 per share can wind up bringing in millions of dollars!

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