The origin of asset-backed securities traces back to 1985 when the Sperry Leasing Finance Corporation issued securities with backing from its computer equipment leases. From there Sperry sold its right to these asset-backed securities to a special purpose vehicle (trust, corporation or partnership) and investor, then purchased interests in the special purpose vehicle through an underwriter. This was the birth of a trillion dollar industry.

The pricing of asset-backed securities has auto loans, credit card debt, home equity loans, student loans and entertainment royalties as the basis for the securities. Credit card debt, home equity loans and auto loans make up about 60% of all asset-backed securities. The risk of the securities is usually relatively modest due to diversification, but that will depend on the financial viability of the underlying assets. If a business wants to invest in or issue asset-backed securities, there are a number of items to consider before proceeding:

1. Identify the uses of asset-backed securities.

2. Understand the structuring and pricing of asset-backed securities.

3. Know the risk and rewards when purchasing asset-backed securities.

Action Steps
The best contacts and resources to help you get it done

Evaluate the basic uses through an introduction to asset backed securities

Unlike other investments such as stocks, asset-backed securities require a better understanding of the process by which companies issue these investment vehicles. With stocks, a person understands that they are buying shares of a given company. However, with asset-back securities, the underlying security is debt from myriad entities.

I recommend: Examine the article "Asset Backed Securities: a practical guide for investors" for a better understanding of the basics of these investments. Investinginbonds.com also has a series of articles on asset-backed securities information and asset-backed securities basics.

Analyze asset-backed securities pricing and structure

The pricing of asset-backed securities is, like stocks, determined by the markets in which they trade. The credit rating service Moody's issues a credit rating on each asset backed security, and this rating helps determine the market value for the asset-backed security. The structure of these financial instruments are similar but can vary some with each company that issues them.

I recommend: Register with the Moody's to view the rating and pricing information on asset-backed securities. Examine this chart from ABSresearch.com to determine the basic structure of an asset-backed security.

Seek professional advice on asset-backed securities

Because these investment vehicles are relatively new, an investor must be diligent in his or her research before investing in asset-backed securities. After all, the underlying security is debt, and in a weak economy this debt can default, leaving an asset-backed security severely devalued.

I recommend: Consult a representative at Chicago Partners or Structured Finance Advisors, which offer asset-backed securities consulting services. Attend ABS securities classes from AFS Seminars to gain a better understanding of these investment vehicles.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Before investing in asset-backed securities -- or any securities -- no matter how safe they may appear, you should always consult an investment professional prior to the purchase for guidance and advice.