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

    Bank Failure: Will Your Assets Be Protected?

    The SIPC and FDIC insure against personal financial ruin when banks or brokerages go belly up.
  2. Financial Advisor

    Are My Investments Insured Against Loss?

    Money invested in a brokerage account has some protection, but that doesn't mean you can't lose it.
  3. Personal Finance

    9 Tips For Safeguarding Your Accounts

    When it comes to keeping your money safe, don't rely on the FDIC - there's much more you can do.
  4. 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.
  5. 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.
  6. Managing Wealth

    Asset Protection for High Net Worth Individuals

    OK, you've made it. Here's how to hang onto it.
  7. Investing

    Who Backs Up The FDIC?

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

    Federal Deposit Insurance Corporation (FDIC)

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

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
  10. Insurance

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
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. Benchmark

    A standard against which the performance of a security, mutual fund or investment manager can be measured.
  2. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  3. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  4. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  5. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  6. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
Trading Center