SIPC Is the Closest Thing to Investing in Insurance
When you deposit money in a bank account, you can rest assured that your deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank. This will protect your savings in the event of a bank failure. What if you invest your money through a brokerage firm ? This is where SIPC insurance comes to the rescue.
SIPC (Securities Investor Protection Corporation) is the closest thing investors have to insuring their brokerage accounts and investments. While SIPC does not protect against market losses such as stock price declines, it does cover clients’ cash and securities in the event of a brokerage firm’s failure.
How SIPC insurance works
SIPC is a not-for-profit corporation chartered by Congress and financed by contributions from its member brokerage firms. If a broker-dealer that is a member of SIPC becomes insolvent, SIPC steps in to recover clients’ assets and return their cash, stocks and other securities.
SIPC protection covers a maximum of $500,000 per customer, with a limit of $250,000 for out-of-pocket claims. So, if you had $200,000 in stocks and $100,000 in cash in your account and your brokerage firm went out of business, you would be covered for the full balance of $300,000.
It is important to note that SIPC does not protect against a decline in the value of an investment due to market fluctuations. It only covers assets that are lost, stolen or misallocated by a brokerage firm experiencing financial difficulties.
Additional protection from brokerage companies
Although SIPC is the legal minimum, many brokerages carry additional private insurance to further protect client assets in excess of SIPC limits. For example, some brokers provide account protection up to $25 million or more. However, even with the support of SIPC and private insurance, investors should always be wary of excessive concentration of assets in a single brokerage firm. Diversification across multiple institutions can further reduce risk.
Conclusion
SIPC insurance is an important guarantee that protects investors’ assets from loss due to the insolvency or misconduct of a brokerage firm. Although SIPC insurance is not as comprehensive as FDIC bank deposit insurance, it still provides a level of security for customer funds and securities held at member brokerages. Understanding what SIPC covers and what it doesn’t can give investors more peace of mind when investing their hard-earned money through brokerage accounts . To gain even more of that priceless peace of mind, here’s our guide to finding a financial planner who won’t scam you .