When investors invest in a company, a “security” is issued to symbolize the amount of money invested. Common securities include stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
A security is a security, but an asset-backed security (ABS) is distinct in the following ways:
- It is created and marketed on behalf of financial institutions (lenders).
- The process involves pooling the assets of finance businesses (individual loans, leases, and credit card debts provided to customers), securitizing them (the process of transforming them into investable securities), and then selling them to investors.
- These securities are backed by the assets–accounts receivable, inventories, and royalties–of the borrowers behind the individual loans.
- Lenders use the funds obtained by selling these securities to lend more money to further borrowers.