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During IPO investment bank buys first stock of company which goes public. But what are the risks for bank? If after the IPO nobody buys these stocks from the bank on stock market, how will it get its money back?

Or risks are already included in idea of investment banking?

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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.

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    That being said, with many IPOs one or more investment banks have deals that require them to purchase a minimum amount of stock, so that the issuing company has a guaranteed minimum it can raise. The banks then sell the shares they bought on to the public, keeping a percentage of the proceeds as their fee. This is called "underwriting". Perhaps this is what the question poster was referring to? The investment banks of course want to guarantee that they can sell their parts for a decent price, so they on their end make deals with institutional investors etc., like you explain. – Pieter Naaijkens May 10 '14 at 10:19
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    Well, yeah, but underwriters will obviously not enter into any purchase contract unless they think its worth their while. Its not unheard of for IPOs to fail. – littleadv May 10 '14 at 19:38
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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

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