A:

First things first, it's only partially correct to think that a portion of your bank deposits is protected. The Federal Deposit Insurance Corporation (FDIC) will insure deposits up to $250,000 in participating institutions. The key here is that the insurance only applies to participating institutions. If you have an account at a bank that does not participate in deposit insurance and the bank becomes insolvent, then you're probably out of luck.

Second, there is nothing that protects your investments, but there is a type of insurance that protects your accounts. If your brokerage becomes insolvent, the Securities Investor Protection Corporation (SIPC) will insure your brokerage account up to $500,000 (only investments registered with the SEC are covered, and only $100,000 in cash is insured). You should, however, be aware of the following:

  1. Like the FDIC, the SIPC covers only member firms. This means you should make sure your brokerage is a member firm. If you are a customer at a large brokerage house, you're probably okay, but it's always a good idea to check. If your account is at a smaller firm, you should not only make sure that this firm is a member but also find out whether another company handles transactions on behalf of your brokerage, in which case you need to make sure that this other company is also a member of the SIPC. The membership of the other company is necessary for your account to be insured.
  2. The SIPC only applies if the brokerage becomes insolvent. Because you bear the risk of your investments, you cannot claim insurance on any losses from your individual securities.

  3. Finally, the SEC has noted that a frequent problem for the SIPC is deciding how much of a person's account has suffered losses because of normal market risks and how much is lost because of unauthorized trading, a frequent cause of brokerage insolvency. If you need to claim losses that are a result of unauthorized trading, you may have to prove to the SIPC that unauthorized trading took place on your account. Therefore, if you ever suspect that an unauthorized transaction on your account has taken place, make sure you send in a letter to the firm for documentation purposes. That way, if your firm ever becomes insolvent, the records can help the SIPC decide which portions of your accounts are covered and which portions are not.

To learn more about the SEC, see Policing The Securities Market: An Overview Of The SEC.

RELATED FAQS
  1. Why are mutual funds not FDIC-insured?

    Discover why mutual funds are not insured by the FDIC, and learn what protection is offered for these and other similar financial ... Read Answer >>
  2. Are 401ks FDIC insured?

    Learn what part of your 401(k) retirement plan is covered by FDIC insurance, and what part is not. Find out what happens ... Read Answer >>
  3. Are my investments insured?

    No. Whenever you invest in a stock, bond or mutual fund, there is no insurance against the possible loss of your initial ... Read Answer >>
Related Articles
  1. Investing

    Mutual Funds Are Not FDIC Insured: Here Is Why

    Find out why mutual funds are not insured by the FDIC, including why the FDIC was created and how to minimize your risk with educated mutual fund investments.
  2. Personal Finance

    The History Of The FDIC

    Find out why this corporation was developed and how it protects depositors from bank failure.
  3. Insurance

    What Happens If Your Insurance Company Goes Bankrupt?

    When insurance companies go bankrupt or face financial difficulty, it's bad news for policy holders.
  4. Managing Wealth

    Asset Protection for High Net Worth Individuals

    OK, you've made it. Here's how to hang onto it.
  5. Personal Finance

    Are Your Bank Deposits Insured?

    Learn how the FDIC is helping to keep your money in your pockets.
  6. Investing

    Who Backs Up The FDIC?

    The FDIC insures depositors against loss, but what happens if it runs out of money?
  7. Insurance

    Federal Deposit Insurance Corporation (FDIC)

    The Federal Deposit Insurance Corporation (FDIC) insures deposits in banks and thrift institutions.
  8. Insurance

    How the Federal Deposit Insurance Corporation (FDIC) Works

    Learn more about the Federal Deposit Insurance Corporation (FDIC) and what happens to your deposits over $250,000 if a member bank fails.
RELATED TERMS
  1. Portfolio Insurance

    1. A method of hedging a portfolio of stocks against the market ...
  2. Securities Investor Protection Corporation - SIPC

    A nonprofit corporation created by an act of Congress to protect ...
  3. Bank Insurance

    A guarantee by the Federal Deposit Insurance Corporation (FDIC) ...
  4. FDIC Insured Account

    An account that meets the requirements to be covered or insured ...
  5. Risk-Based Deposit Insurance

    Deposit insurance with premiums that reflect how prudently banks ...
  6. Deposit Interest Rate

    The interest rate paid by financial institutions to deposit account ...
Hot Definitions
  1. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  2. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  3. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  4. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  5. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  6. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
Trading Center