Asset-backed security

Hello! Have you ever heard of piggy banks? When you put money in a piggy bank, it stays there until you need it. Now, let's say you have a lot of piggy banks, and you want to use the money in them to buy something big, like a car or a house. But you don't want to break all the piggy banks to get the money out, right?

That's where asset-backed securities come in. It's like having one big piggy bank that holds the money from all your little piggy banks. Instead of breaking each piggy bank to get the money out, you can sell the whole giant piggy bank to someone else who wants to buy it.

Now, instead of piggy banks, think of loans like car loans, home mortgages or student loans. Banks and other financial institutions give out these loans to people who want to buy a car or a house, or go to school. But just like you don't want to break all your piggy banks to get the money out, banks don't want to wait for years to get all their money back from all the loans they gave out. That's where asset-backed securities come in again.

To make an asset-backed security, a bank or financial institution takes a group of these loans and puts them together into one package. They then sell shares of that package to investors as a single security. The investors get paid back based on the payments that people make on their loans.

For example, let's say you buy a share of an asset-backed security that's made up of car loans. If the people who took out the car loans keep making their monthly payments, then you'll get a little bit of money each month as your share of the payments. If people stop making payments, then you might not get as much money.

So, asset-backed securities are just like piggy banks! They hold a bunch of loans like car loans, home mortgages, or student loans altogether. Then, these securities are sold to people who want to invest and earn money from them. The payments made on these loans go to the investors who bought shares of the asset-backed securities.