What is Securitization?

Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Securitization”.

Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. A securitization is a financial transaction in which assets are pooled and securities representing interests in the pool are issued. An example would be a financing company that has issued a large number of auto loans and wants to raise cash so it can issue more loans.
A typical example of securitization is a mortgage-backed security, which is a type of asset-backed security that is secured by a collection of mortgages. It is the process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.
The process creates liquidity by enabling smaller investors to purchase shares in a larger asset pool. Using the mortgage-backed security example, individual retail investors are able to purchase portions of a mortgage as a type of bond. Without the securitization of mortgages, retail investors may not be able to afford to buy into a large pool of mortgages.

By Barry Norman, Investors Trading Academy