It is not unheard of for a stockbrokerage to make bad decisions with its own accounts and find itself unable to cover the losses.
If you have cash or securities in a brokerage account and the stockbroker becomes insolvent you may lose everything. However, there is one step you can take to make sure that even if the worst happens your assets can be protected.
Securities Investor Protection Corporation, or SIPC helps insure investors' assets much in the same way the Federal Deposit Insurance Corporation, or FDIC protects deposits in covered banks.
The SIPC is a voluntary insurance program that stockbrokers can join by paying an insurance premium to provide protection to their customers in the event the company becomes insolvent.
Virtually all stockbrokers are covered by SIPC insurance, but do not assume that the one you pick is covered unless you verify the stock brokerage is covered. Brokerages not by SIPC insurance are legally obligated to inform their customers. However that doesn't mean an unscrupulous broker would bother with that legal detail or the notice could be buried in tiny type on the terms of agreement page.
In most cases the bankrupt stockbroker will turn its assets over to the SIPC which asks the court to appoint a trustee to oversee the disposition of the remaining assets. If there is a shortfall between what customers believe they had in their accounts and what is available in cash and securities to distribute, the SIPC will make up the difference.
The coverage is up to $500,000 and that includes up to $250,000 in cash. The coverage applies to each account rather than the total sum of your assets with the broker.
For example if you have a regular trading account and a retirement account the SIPC will cover both of these accounts individually, so your total potential coverage is $500,000 per account or up to $1 million.
It is important to know that if you have shares with the broker that are missing the SIPC will simply replace though shares regardless of the profit or loss on the shares during the recovery process. For example if you had 100 shares of stock that was valued at $50 per share when the brokerage failed, but the socket fallen to $35 a share by the time the SIPC replaced your shares you would have to suffer the loss. SIPC does not guarantee of value of your investments only that they will replace the shares.
This is different than the FDIC, which insures bank accounts and will replace the full value of your account regardless of how long it takes.
It is also important to note, the SIPC does not cover many of the more exotic or products or derivatives. SPIC will cover basic products such as stocks, bonds. mutual funds and other investments. More exotic products such as futures counts, currency accounts and other exotic products are generally not covered. If you are concerned about this check with the broker or the SIPC website to determine if the assets you own are covered by their insurance.
Some stockbrokers buy additional coverage from other sources, so check to see what's covered and if the insurance covers assets not covered by the SIPC.
You are also not covered if your broker recommends investments that turn out to be turkeys.
It's a good idea to keep trading statements and account summaries because in many cases the SIPC will ask for proof of your claim.
The chances of your stockbroker failing are not large, however it happens and when it does you do not want to be uninsured.