A pass-through security in the context of stocks refers to a type of investment instrument that allows the income generated from a pool of underlying assets to pass through to investors. It is commonly associated with mortgage-backed securities (MBS) and asset-backed securities (ABS).

In the case of mortgage-backed securities, pass-through securities represent a share of the cash flows generated by a pool of mortgage loans. The payments made by homeowners on their mortgages, including principal and interest, are collected and then distributed to the holders of the pass-through securities. Investors in these securities essentially receive a pro-rata portion of the cash flows from the underlying mortgages.

Similarly, asset-backed securities function in a similar manner, but the underlying assets can include various types of loans such as auto loans, credit card receivables, or student loans. The cash flows generated by the repayment of these loans are passed through to the investors holding the asset-backed pass-through securities.

Pass-through securities provide investors with a way to gain exposure to a diversified pool of underlying assets and to receive regular income based on the performance of those assets. They are often traded in the secondary market and can offer opportunities for income-focused investors seeking predictable cash flows.

Pass-through securities are financial instruments where the cash flows from underlying assets, like mortgages, loans, or other receivables, are passed directly to investors. In stocks, the term isn’t commonly used, but in broader finance, it’s prominent in mortgage-backed securities (MBS). These securities are created when a pool of loans is bundled together and sold to investors. The payments from borrowers—both principal and interest- are then “passed through” to the holders of the security, minus servicing fees. Although not directly related to traditional stocks, understanding pass-through securities is important for equity investors interested in real estate investment trusts (REITs) or other structured products. These instruments can offer predictable income streams but may carry prepayment and interest rate risks.