Economically, REPO represents borrowing secured by securities. One party receives money and transfers securities, while the other provides funds and receives collateral. The difference between the sale price and repurchase price constitutes the fee for using the money and is economically equivalent to an interest rate.
The instrument is widely used for managing short-term liquidity. Central banks use REPO operations to provide and withdraw funds from the banking system, making them part of the monetary policy mechanism. Banks and professional market participants use REPO to cover temporary liquidity gaps.
Risk is associated with changes in collateral value: if the price of transferred securities falls, the lending party may require additional funds. The mechanism is similar to margin trading, and consequences of non-compliance with such requirements are analogous.
For a private investor, REPO in most cases remains an infrastructure operation affecting money market rates and, through them, the returns on short-term instruments, rather than an independent investment method.