The Securities Investor Protection Corporation (SIPC) is a non-profit organization created by the Federal government to protect investors in the case their brokerage company fails. This only protects investors from losses due to the brokerage failing, not from losses in the markets themselves. So, if your brokerage “goes under,” your money is protected, but if you buy a stock and its value goes down, the SIPC does not cover you.

The SIPC was created in 1970 by the Securities Investor Protection Act. It is not a government agency, but instead a non-profit corporation funded by its members. Its purposes are both to organize distributions in case of a default and also to provide insurance in the case that the brokerage’s assets do not cover the account holder’s positions.

Other Types of Insurance

It is important to be aware to what degree your brokerage account is insured. In addition to SIPC insurance, many times brokerages will have separate private insurance to cover additional amounts. This information is usually readily available from your broker. It can be very risky to have net equity in your accounts in excess of the amount covered by this insurance.

SIPC vs. FDIC

SIPC insurance is very different from FDIC insurance. Congress considered making the SIPC as far reaching as the FDIC, but opted against it. Typically it was perceived that this kind of insurance would be illogical in a market where risk is an accepted part of the environment. Thus there are many kinds of “wrongdoing” that might not be protected by SIPC insurance. By statute, SIPC protects those whose securities were misappropriated, never purchased, or stolen. It has not covered other kinds of claims against brokers, such as fraudulent sales practices or suggestion of inappropriate investment vehicles.

Types of Holdings Covered

The insurance protects most types of securities, but does not cover every type of holding. Som prominent examples are commodity or futures contracts. You should be very sure about how much and what kind of investments are covered by insurance on your brokerage accounts. You should also monitor your balances and be aware if you have any change in coverage.