Are brokerage accounts FDIC insured?

If you’re an investor, it’s natural to wonder how safe your money really is. And if you’ve heard of Federal Deposit Insurance Corporation (FDIC) insurance, you may wonder if it applies to brokerage accounts.

Off the bat, it’s important to understand that FDIC insurance only protects money in FDIC-member bank accounts, not money held in investment accounts. Understanding the difference between bank protection and brokerage protection can help you feel more confident in your investing journey.

Keep reading for more information about protections your brokerage account may offer and the differences between FDIC insurance and Securities Investor Protection Corporation (SIPC) insurance.

What is FDIC insurance and what does it cover?

FDIC insurance protects your money from a potential bank failure by insuring your deposits for up to $250,000 at each FDIC-insured bank per depositor. This level of insurance exists so the federal government can step in to ensure you don’t lose your money (up to a set limit) in case of a bank failure.

You don’t have to sign up or pay for this coverage – it’s automatically included when you open an eligible account at an FDIC-insured bank. FDIC insurance covers the following deposit accounts:

Understanding brokerage accounts

A brokerage account is an account you open with a financial company that allows you to buy and sell investment products. Instead of holding your money in cash, the way a bank account is designed to do, a brokerage account is primarily designed for investing. With a brokerage account, you can own a variety of assets, including stocks, bonds and mutual funds.

The biggest difference between a bank account and a brokerage account is that the former is designed for storing money safely and handling everyday financial needs. The latter, however, is meant for investing your money so it can grow over time. It’s important for consumers to know that investments held in a brokerage account come with risks, since the value of investments can go up or down depending on the market’s performance.

Are brokerage accounts FDIC insured?

As covered above, no, brokerage accounts are not FDIC insured. FDIC insurance only protects money kept in bank deposit accounts, such as checking or savings accounts. Because brokerage accounts are for investments, they fall outside the FDIC’s coverage.

The main reason for this is that investments involve risk. When you buy stocks, bonds, mutual funds or other assets via an investment account, the value of those assets can rise or fall depending on the market. The role of the FDIC is to protect cash deposits at banks.

If your brokerage firm were to go out of business, the FDIC wouldn’t step in to reimburse you for your loss. Instead, a different type of protection called SIPC insurance may apply, but it works differently from FDIC insurance.

How are brokerage accounts protected and insured?

While brokerage accounts aren’t covered by FDIC insurance, they do have their own form of protection through SIPC. SIPC is a nonprofit organization established by Congress to help protect investors if their brokerage firm fails or becomes insolvent.

SIPC insurance protects the securities and cash in your brokerage account if your brokerage firm goes bankrupt or if it runs into financial difficulties. The coverage limit is $500,000 per customer, including a maximum of $250,000 in cash. The protection is per customer, per firm – so you can have coverage at multiple SIPC member firms.

It’s important to note that this insurance protects securities like stocks, bonds and mutual funds, but not commodities or futures contracts.

SIPC does not protect against losses caused by the ups and downs of the market, however. For example, if your stocks lose value because the market drops, SIPC won’t help you. It also doesn’t protect you if you buy unprofitable investments or receive bad financial advice. SIPC steps in only if your brokerage firm fails to return the securities and cash you rightfully own.

It’s important to note that most brokerages in the U.S. are SIPC members, but you can verify a firm’s membership status on the SIPC website. Coverage is automatic – you don’t need to apply for this protection or pay any fees to be eligible.

Additional protections for brokerage accounts

In addition to SIPC insurance, many brokerage firms have other safeguards in place to protect their customers. For example, some brokerages buy private insurance policies that go beyond SIPC’s standard limits, which can provide more coverage for your cash and investments if a firm fails. To find out if your brokerage offers extra protection, check their website, review your account documents or reach out to their customer service for details.

Brokerages are also required to keep customer money separate from the company’s own funds. This means your cash and investments are held in accounts that the brokerage can’t use for its own business. Keeping these funds separate makes it easier for the company to return your assets if it runs into problems.

Finally, brokerage firms must follow strict rules and undergo regular audits to demonstrate they’re handling customer accounts responsibly. These requirements are designed to make sure firms stay financially healthy – and that your money is properly protected.

Key differences between FDIC and SIPC insurance

FDIC insurance and SIPC insurance may sound similar, but they protect different types of assets. FDIC insurance is tied to banks and covers deposits in checking and savings accounts. If your bank fails, the FDIC guarantees your money is safe up to a certain limit, no matter what happens to the bank.

SIPC insurance is connected to brokerage accounts. It protects the investments and cash you hold with a brokerage firm if the firm itself fails, but it doesn’t protect you from market losses. If your securities decrease in value, that’s simply part of the risk of investing.

There are notable differences in coverage limits. SIPC insurance covers $500,000 per customer per firm with a $250,000 limit for cash held in brokerage accounts. FDIC insurance covers $250,000 per depositor per bank.

The bottom line

Brokerage accounts aren’t covered by FDIC insurance, but there are safeguards in place to protect your investments. Many brokerage accounts are backed by SIPC insurance, which kicks in if the firm fails and can’t return your cash or investments. On top of that, brokerages are required to keep customer assets separate from firm assets, and they often carry extra insurance for supplemental protection.

The key takeaway for investors is this: If your brokerage firm is a SIPC member, your account may be protected through SIPC, subject to certain limits and conditions. And while this coverage cannot shield you from market fluctuations, it does work to help safeguard your assets if your brokerage firm fails.

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