SIPC protection
Coverage that restores up to $500,000 of missing securities and cash, including a $250,000 cash limit, if a member brokerage fails.
What it means
The Securities Investor Protection Corporation is a nonprofit created by federal law, funded by its member brokerage firms. When a member firm fails and customer assets are missing, for example because of fraud or bookkeeping errors, SIPC helps return customers’ securities and cash. Coverage is up to $500,000 per customer, per ownership capacity, of which no more than $250,000 can be cash.
SIPC is not insurance against market losses. If an investment falls in value or a company goes bankrupt, SIPC does not make up the difference. It also does not cover assets that are not registered securities, such as many commodity contracts. Because brokerages must keep customer assets separate from their own, customers often get most assets back even before SIPC steps in.
Example
Suppose a brokerage fails and a customer is missing $300,000 in stocks and $100,000 in cash. The total of $400,000 is within the $500,000 limit and the cash is under the $250,000 cash limit, so SIPC would cover the full amount. If the same stocks had simply dropped 20% in a downturn, SIPC would pay nothing.
How it’s used
- Understanding what happens if a broker goes out of business
- Comparing brokerage protection with FDIC bank insurance
- Deciding how to hold very large investment accounts
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.