Wednesday, March 26, 2008

What is SIPC and what does it protect?

SIPC or Securities Investor Protection Corporation is effectively an insurance company that assures that your securities at your broker will be replaced should your broker declare bankruptcy or if your broker steals any of your securities. Basically, your broker (brokerage firm) pays an insurance premium to SIPC to guarantee you will get back any securities that you have entrusted to your broker.

SIPC is not like FDIC in the sense that it does not guarantee the dollar value of your securities should they decline. SIPC only covers the number of shares or units of securities. SIPC will in effect only guarantee that you get your securities back.

SIPC covers up to $500,000 of securities and up to $100,000 in cash. Note that money market funds are considered securities.

A lot of brokers automatically purchase supplemental coverage from an insurance company (not SIPC) to cover any losses over $500,000 and over $100,000 in cash. Coverage will vary, so you will have to check with your broker for their specific coverage. At least one of my brokers has purchased unlimited coverage for both securities and cash, even though I am well under the SIPC limits.

To summarize, SIPC does not protect you from stock market losses or bankruptcy of companies whose securities you have purchased, but it does protect you against bankruptcy of your broker or theft by your broker.

-- Jack Krupansky


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