What does investment bank risk during IPO?
Investment banks don't have to buy anything. If they don't think the stock is worth buying - they won't. If they think it is - others on the secondary market will probably think so too. Initial public offering is offering to the public - i.e.: theoretically anyone can participate and purchase stocks. The major investment firms are not buying the stocks for themselves - but for their clients who are participating in this IPO. I, for example, receive email notifications from my brokerage firm each time there's another IPO that they have access to, and I can ask the brokerage to buy stocks from the IPO on my behalf. When that happens - they don't buy the stocks themselves and then sell to me. No, what happens is that I buy a stock, through them, and they charge me a commission for the service. Usually IPO participation commissions are higher than regular trading commissions. Most of the time those who purchase stocks at IPO are institutional investors - i.e.: mutual funds, pension plans, investment banks for their managed accounts, etc. Retail investors would probably not participate in the IPO because of the costs, limited access (not all the brokerage firms have access to all the IPOs), and the uncertainty, and rather purchase the stocks later on a secondary market. "There are two kinds of engagements in an IPO. The traditional kind where the Banks assume the risks of unsold shares. Money coming out of their pockets to hold shares no one wants. That is the main risk. No one buying the stock that the bank is holding.  Secondly, there is a ""best efforts"" engagement. This means that bank will put forth its best effort to sell the shares, but will not be on the hook if any don't sell. This is used for small cap / risky companies.  Source: Author/investment banker"
Not sure of the question here if by IPO(initial public offering) you mean private company then:  A company can invest its excess money into other companies, to earn returns.  Also a company that is private can attract private investment if the sector is doing well on publicly traded markets.  Finally a company can diversify away risk, by holding shares of a company that would benefit in the event of a disruption in their own industry. Different stakeholders have different views of 'failure'. Maybe from Air Berlin's point of view it was a failure, but technically speaking it is not really possible to 'fail'. As long as all shares were purchased, which is a virtual guarantee since the investment banks who underwrite the IPO by and large must do to some extent, it will always be 'successful'. A decrease in value of shares immediately after IPO means that the investment bank who did the IPO for Air Berlin didn't match its IPO price with market expectations, causing shorts on the stock, and thus a decline. No failure per se. Disclaimer: I don't work in the finance industry, and simply took a few classes in corporate finance and management during my undergrad.  It depends on what type of investing you're talking about. If you're talking about building a portfolio of securities, then CAPM is the basis for most valuation models. Generally, CAPM will have you discount based on your best available risk-free rate (usually t-bills or some other fixed income source with a reliable backer). Even after your valuation, the basic theory of risk management for an investment portfolio is still to maintain a diverse basket of poorly correlated products.  If you're talking about corporate finance where a firm is considering an investment such as a new project, then a determining a WACC and using it as a discount rate for your cash flow is a basic strategy.   This is a basic strategy, but there are better ones depending on the specifics of the investment. This is where evaluating exposures is important. To hedge counterparty risk, you might discount by the estimated probability of non-payment or buy trade insurance. To hedge currency risk, you might buy forwards, options, or look into a money market hedge. To hedge political risks like repatriation or changes in tax laws or regulation you might buy political risk insurance. To hedge exposure to a particular commodity price, you can trade futures. The interest that you are proposing to pay your MIL is actually quite low compared to even extremely conservative investing which easily earns 7% or more with quantifiable low risk. You claim that it would be no risk, but what would happen if you lost your job? The risk she faces is more or less exactly what a bank would experience while giving the loan, or in other words it is pretty much whatever your credit score says. Even worse, she does not have a large pool of investments to distribute this risk like a bank would. Making loans this large in a family situation is a recipe for disaster. Taking a huge risk with the relationship your wife has with her mother over three points of interest is exceptionally unwise. Are these private or federal student loans? Federal student loan debt is some of the safest to carry due to its income based repayment plans and eventual loan forgiveness after 25 years. Have you investigated income based repayment options? "They aren't necessarily trustworthy. Many institutions claim to have a ""Chinese Wall"" between their investment banking arms and analysis arms. In practice, these walls have sometimes turned out to be entirely imaginary. That is, analysis is published with an eye to what is good for their investment banking business. One of the most notorious cases of this was Henry Blodget, an analyst with Merrill Lynch during the dot-com bubble. Blodget became a star analyst after he correctly predicted Amazon would hit $400/share within a year. However some of his later public analysis dramatically conflicted with his private comments. Famously when he started covering GoTo.com, rating it as ""neutral to buy"", he was asked  ""What's so interesting about Goto except banking fees????"" Blodget replied, ""nothin"". Eventually he was permanently banned from the securities industry." A consortium of investment banks go on a road show to their clients to see who's interested at which price in the IPO. The arrange this price through various financial models to determine the market value of the company.  The banks price the offering deliberately low to ensure a pop on the open of trading to send a positive signal to the market. This is their story at least, IPOs mispriced on the low side result in less money for the company making the offering.  I think a better way to perform an IPO is the way google did the theirs; a reverse auction. This is the same way the treasury sells bonds and definitely would put more money in the companies and less in the banks. Unfortunately the banks don't love the idea and you need a lot of clout to get them to change their minds. Risks: That's a very good question.. of which I didn't know the answer. I didn't pay very close attention when they actually IPO'ed, so I researched just now and I couldn't believe the amount of public complaining the banks did about Google's IPO structure. Hilarious in retrospect.   Either way, in a very satisfying development, Google only paid 3% on the underwrite. The offering was worth almost $3B which means $100m for the banks, but they didn't have to do a road show or make a single call to sell the thing, so I'd say that was more than fair.  {[Source](http://www.slate.com/articles/business/moneybox/2004/07/frugal_google.html)}  &gt;Google's IPO price will thus be set naturally by all interested market participants, not artificially by underwriters. Google—and not well-connected investors—will receive the full benefit of investors' enthusiasm for the stock. To add insult to the injury of the chastened investment bankers, Google has decreed that it'll only pay a 3 percent underwriting fee.