Financial Terms / securitization

Securitization Explained

Securitization is a process of pooling assets together, like mortgages, to create a financial instrument that can be sold to investors.

What is Securitization?

Securitization is the process of transforming an illiquid asset into an investable security.

What are the benefits of Securitization?

Securitization has a number of benefits, including increased liquidity, diversification, and access to capital markets.

How does Securitization work?

In securitization, an illiquid asset is pooled together and sold as a security to investors. The security is then divided into different tranches which have different levels of risk associated with them.

What are the risks associated with Securitization?

The main risks associated with securitization are credit risk, liquidity risk, and interest rate risk. Credit risk is the risk that the underlying assets may not perform as expected, leading to losses for investors. Liquidity risk is the risk that the security may not be able to be sold in the market. Interest rate risk is the risk that interest rates may change, leading to losses for investors.

Key Points

Transform Illiquid Assets into Investable Securities
Securitization is the process of taking illiquid assets and transforming them into securities that can be bought and sold in the market. This process can help investors diversify their portfolios and create value from assets that would otherwise remain illiquid.
Risk Management
Securitization can also reduce risk by allowing investors to spread their investments across different asset classes. By diversifying their portfolios, investors can reduce their exposure to any one particular asset and better manage their overall risk.
Access to Capital
Securitization allows companies to access capital quicker than traditional financing methods. This can be particularly beneficial to small- and medium-sized businesses who may not have access to traditional financing methods.
Lower Cost of Capital
Securitization can also lower the cost of capital for companies. By creating an investable security, companies can attract more investors and thus lower the cost of capital for their projects.
Increase Liquidity
Securitization can also increase liquidity in the markets by making it easier for investors to buy and sell securities. This increased liquidity can help reduce volatility in the markets and make investing more accessible to a wider range of investors.

Get smart about your data.

Connect, sync, and query data from 37+ data sources, without code.
Get unlimited access free for 14 days.