When you deposit your money in a bank account, you can rest assured that the Federal Deposit Insurance Corporation (FDIC) insures it up to $250,000 per depositor and per insured bank. This protects your savings if the bank fails. But what happens if you invest your money through a securities company? That's where SIPC insurance comes in.
SIPC (Securities Investor Protection Corporation) is the closest thing investors have to insurance for their brokerage accounts and investments. SIPC does not protect against market losses such as stock price declines, but it does cover a customer's cash and securities in case the brokerage firm goes bankrupt.
How SIPC insurance works
SIPC is a not-for-profit corporation with a Congressional mandate that is funded by the ratings of its member securities firms. If a SIPC member broker-dealer goes bankrupt, SIPC steps in to recover customer assets and return cash, stock, and other securities.
SIPC protection covers up to $500,000 per customer with a cash claim limit of $250,000. This means that if you have $200,000 in stock and his $100,000 in cash in your account, and your brokerage goes out of business, your $300,000 balance will be fully covered.
It is important to note that SIPC does not protect against a decline in the value of your investment due to market fluctuations. It only covers lost, stolen, or misallocated assets by financially troubled brokerages.
Additional protection from your brokerage firm
Although the SIPC is a legal minimum, many brokerages carry additional private insurance to further protect client assets beyond the SIPC limit. For example, some brokers offer account protection of up to $25 million or more. Still, even with a SIPC or private insurance backstop, investors should always be careful not to concentrate too much money in a single brokerage. Risk can be further reduced by spreading it across multiple institutions.
Take out
SIPC insurance is an important safeguard that protects investors' assets against losses due to brokerage bankruptcy or fraud. Although not as comprehensive as FDIC insurance for bank deposits, SIPC still provides a layer of security for customers' cash and securities held at member brokerages. Understanding what SIPC does and does not cover can give investors greater peace of mind when investing their hard-earned money through a brokerage account. If you would like to learn more about this irreplaceable sense of security, please click here. A guide to finding a financial planner that won't rip you off.
