I know there is a form of deposit insurance where a portion of my bank account deposits is protected. Is there anything like this for my investments?

By Investopedia Staff AAA
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.

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