When you put your money in a bank account, you have reassurance that your deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank. This protects your savings in case the bank fails. But what if you invest your money through a brokerage firm? That’s where SIPC insurance comes in.
SIPC (Securities Investor Protection Corporation) is the closest thing investors get to insurance for their brokerage accounts and investments. While it doesn’t protect against market losses like a decline in stock prices, SIPC does cover customers’ cash and securities in case a brokerage firm fails.
How SIPC insurance works
SIPC is a non-profit, congressionally mandated corporation funded by assessments on its member brokerage firms. If a SIPC member broker-dealer becomes insolvent, SIPC steps in to recover customers’ assets and return their cash, stocks, and other securities.
SIPC protection covers a maximum of $500,000 per customer, with a $250,000 limit for cash claims. So if your account contained $200,000 in stocks and $100,000 in cash, and your brokerage firm went under, you would be covered for the full $300,000 balance.
It’s important to note that SIPC does not protect against declines in investment values due to market fluctuations. It only covers assets that are lost, stolen, or misallocated by a financially troubled brokerage firm.
Additional protections from brokerage firms
While SIPC is the legal minimum, many brokerages carry additional private insurance to further protect customer assets above the SIPC limits. For example, some brokers provide up to $25 million in account protection or more. Still, even with SIPC and private insurance backstops, investors should always be cautious about over-concentrating assets with a single brokerage firm. Diversifying across multiple institutions can further mitigate risk.
The takeaway
SIPC insurance is an important safeguard that protects investors’ assets from loss due to a brokerage firm’s insolvency or misconduct. While 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 covers—and what it doesn’t—can give investors greater peace of mind when investing your hard-earned money through brokerage accounts. For more of that priceless peace of mind, here’s our guide to finding a financial planner who won’t rip you off.
