Are Funds In A Brokerage Account Insured?

Ever thought to yourself "are funds in a brokerage account insured?". If so, don't worry, you're not alone. Especially if you haven't been living in a closed box over the last few years.

Recently, a question was submitted as to whether "money is guaranteed or not, and if so, by who?".

Since money is held in different types of accounts, I added an article yesterday about the role of the FDIC geared towards funds in a bank account insured while this brief article is about funds in a brokerage account insured.

Fund's held in a brokerage account are backed by the Securities Investor Protection Corporation (SIPC) as long as the broker firm is a current member of the SIPC. As with any type of insurance, there are always specifics that apply under different circumstances.

Funds in a brokerage account insured

Here is a quote from the SIPC website on their role and how they are different from the FDIC:

THE ROLE OF SIPC

SIPC is not the FDIC. The Securities Investor Protection Corporation does not offer to investors the same blanket protection that the Federal Deposit Insurance Corporation provides to bank depositors.

How are SIPC and the FDIC different? When a member bank fails, the FDIC insures all depositors at that institution against loss up to a certain dollar limit. The FDIC's no-questions-asked approach makes sense because the banking world is "risk averse." Most savers put their money in FDIC-insured bank accounts because they can't afford to lose their money.

That is precisely the opposite of how investors behave in the stock market, in which rewards are only possible with risk. Most market losses are a normal part of the ups and downs of the risk-oriented world of investing. That is why SIPC does not bail out investors when the value of their stocks, bonds and other investments falls for any reason. Instead, SIPC replaces missing stocks and other securities where it is possible to do so...even when investments have increased in value.

SIPC does not cover individuals who are sold worthless stocks and other securities. SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons.


What SIPC Covers... and What it Does Not

The cash and securities - such as stocks and bonds - held by a customer at a financially troubled brokerage firm are protected by SIPC.

Among the investments that are ineligible for SIPC protection are commodity futures contracts (unless defined as customer property under the Securities Investor Protection Act) and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

So if you money is backed and insured by the FDIC in a member bank, your funds will be covered if the bank itself fails by the FDIC as long (as everything else meets their requirements and limits of course).

In the case of funds in a brokerage account, the SIPC helps by providing protection in the case of the member broker or member brokerage firm failing to produce cash or securities that were in your account (again, meeting specific requirements and limits as well).

The SIPC's website has a lot of information to look through and I could write 20 or more pages to go through everything already covered there, so here are a few links to pages on their website you may want to get started with for further information:

In neither situation, thru the FDIC nor the SIPC, are personal funds backed, insured, guaranteed or whatever you want to call it, against losses resulting from personal investing decisions due to a decline in the value of the investment. Investing carries risk and the choice to take on that risk is just that, a choice, and it's your choice to make.

So if your question is "when I purchase stocks will the money I used for my investment be guaranteed?" The answer is no! If you're looking for a guarantee, look into a savings account or a CD.

As with any type of insurance, the insurance is only good as long as the company or organization backing the program is. If the backer can't afford to make a payout, then how good is the guarantee?

Note: The above information was gathered and interpreted to the best of our ability. Please review information at the SIPC and FDIC for accuracy and verification. We make no warranties, express or implied.....




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