How SIPC Works and How SIPC Differs from FDIC Insurance

How SIPC Insurance Can Protect Your Brokerage Account

With news of banks such as IndyMac failing and being taken over by FDIC, a lot of people are questioning not only how safe their deposits are, but their investments in brokerage accounts and mutual fund companies as well. One thing you have to remember is that FDIC only protects deposit accounts at an FDIC insured bank, and that coverage is only on the first $100,000 in each account. But what about money that you have in your IRA or brokerage account? How is that protected?

Securities Investor Protection Corporation

Just like how the FDIC insures bank deposits in the event of a bank failure, SIPC insures investment accounts in the event of a failure. In the case with SIPC, accounts are insured up to $500,000 per account. This includes $100,000 in cash. When a brokerage is closed due to a bankruptcy or other reason and investor’s securities are missing, the SIPC steps in to return these assets.

What SIPC Doesn’t Insure

The SIPC only covers losses due to a brokerage failure, or other unscrupulous activity. SIPC does not insure losses that occur as a part of regular market fluctuation. Many people believe that SIPC will protect them from losing all of their money on a bad investment, but this isn’t true.

SIPC also does not cover losses in the event a company you invest in goes bankrupt. If you invest $50,000 in XYC Corp. and they file for bankruptcy, leaving your shares worthless, SIPC has nothing to do with these losses. SIPC will only protect your assets if the brokerage or fund company you hold your assets with goes bankrupt.

Keep in mind that not all investments are protected by SIPC. In general, SIPC covers stocks, bonds, mutual funds, notes, and other investment company shares, and other registered securities. It does not cover instruments such as unregistered investment contracts, unregistered limited partnerships, fixed annuity contracts, currency, and interests in gold, silver, or other commodity futures contracts or commodity options.

Also, some brokerages will offer an FDIC insured money market account for your cash that is sitting idle in your account. This means you could technically have both FDIC insured cash, and FDIC insured investments in the same account. Of course, this will vary depending on your broker and where your cash position is invested, so be sure to find out how your money is treated.

Learn More About SIPC

Be sure to visit the SIPC website for more information, and you can even search their database of member firms to make sure that your investments are covered. Most major brokerages are covered, just like most banks are covered by FDIC, but it is always worth checking.

Related posts:

1. ING Direct Increases Savings Rate To 4.5% APY, But There Are Still Better Options Available
2. A Losing Investment Isn’t Always A Bad Thing
3. Brokerage Money Market Funds – A Great Cash Option
4. Brokerage Profile: TD Ameritrade
5. There is More to Auto Insurance Than Meets the Eye: Understanding the 6 Types of Standard Coverage