How Safe Are Brokerage Accounts?
While no stock broker insures your account against losses in the stock market, most brokerage firms insure their customers' accounts. This insurance typically covers cash in the account and the stocks owned by the customer, but held in the brokerage's name. Almost all stock brokers register securities in the brokerage's name, unless the customer requests otherwise.
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The SIPC
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The Securities Investors Protection Corporation (SIPC) is the major insurer of brokerage accounts. It is not like the Federal Deposit Insurance Corporation (FDIC). The SIPC is not backed by the federal government. Make sure your brokerage firm is covered by the SIPC. The SIPC only covers SIPC members.
What's Covered
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Member brokerage firms fund the SIPC. It is a nonprofit corporation. SIPC loss coverage is limited to $500,000 per customer and $100,000 for cash in a brokerage account. The SIPC does not cover investment losses unless the losses were caused by trades you did not authorize. Commodity contracts are not covered.
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Stock Market Losses
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While your shares of stocks, mutual funds or bonds are guaranteed, the market value of those securities are not insured. If your brokerage firm goes bankrupt, and you had 100 shares of General Electric stock, you will receive 100 shares of General Electric stock from the SIPC. If your shares of GE lost value in the market, those losses are not covered.
Private Insurance
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Large brokerage firms, such as Scottrade or Charles Schwab, often purchase additional protection for their investors above and beyond the SIPC limits. Check your firm's website for additional information.
Conclusion
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The brokerage is not responsible for your investing decisions. Insured brokerage accounts protect you only if the brokerage itself goes bankrupt or if your money was stolen or misappropriated. According to the SIPC website, it can one to three months to receive your money back in getting your money back if any of these problems arise.
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Resources
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