When investors purchase different types of contractual debt, such as residential mortgages, commercial mortgages, auto loans, and credit card debts, as securities, the correct term is securitization. Securitization poses both advantages and disadvantages to investors. For example, an investor in a home mortgage securitization can decrease the risk of a decline in investment value by spreading the risk among multiple investors rather than a single investor.
Securitization also helps create a fair market environment because more investors shoulder the risk and eliminate the possibility of a small pool falsely inflating or deflating the investment’s value. Although securitization often makes high-risk investments more appealing, investors and lenders still need to practice caution and monitor risk. If a number of securities lose their value too quickly, the investment pool can become unsustainable.