The collapse of the Silicon Valley Bank in March 2023 left many depositors worrying about the safety of their bank deposits and by extension, their brokerage account deposits. You might be wondering: are brokerage accounts FDIC-insured? Since the Federal Deposit Insurance Corporation (FDIC) only protects bank account deposits, it does not cover brokerage account funds.
A different insurance protects investors from losses caused by brokerage firm bankruptcies. Most brokers are Securities Investor Protection Corporation (SIPC) members. The SIPC offers account holders at member brokers insurance.
What is FDIC Insurance?
The FDIC) is an independent agency of the U.S. government. It covers traditional bank depositors, protecting their funds in case the bank fails. FDIC insurance is a crucial consumer safety net. This insurance ensures banked funds are secure when banks face financial troubles. Any person or business is eligible for FDIC coverage even if they are not U.S. citizens.
FDIC sets insurance limits for each depositor and account ownership category.
The FDIC deposit insurance covers losses to a limit for each depositor and for each account ownership category. Limits are as follows:
- Single accounts: Up to $250,000 per depositor, per bank
- Joint accounts: Up to $250,000 per co-owner, per bank
- Revocable trusts: Under certain conditions, insurance coverage can extend to $250,000 per beneficiary. There is a maximum of five beneficiaries.
- IRAs and other retirement accounts: $250,000 per owner
- Business Accounts: Business insurance coverage of $250,000
These limits apply on a per-bank, per-account type basis and include deposits whether they’re in savings, money or checking accounts. Time deposits, cashier’s checks and money orders are covered. If you have accounts at more than one bank, your funds are insured up to the limit for each bank. Earned interest is also covered under the limit to the day the financial institute closes. The FDIC does not cover investments like stocks or bonds even if you bought those investments through an FDIC-insured bank because your investments are bought in a separate brokerage account.
Understanding Brokerage Accounts
Brokerage accounts are not bank accounts. Brokerage accounts hold investment funds used to buy and sell stocks, bonds and mutual funds. The main purpose of brokerage accounts is to facilitate investment. Different rules and regulations apply to these accounts.
Traditional bank accounts are used for storing funds and for day-to-day transactions. Bank account holders can earn income from interest on funds in the bank. The government insures funds in bank accounts through initiatives like the FDIC.
Still, brokerage account holders are not without protection since brokers follow SIPC regulations. The SIPC is a non-profit organization that is federally mandated. It offers limited protection against broker insolvency or funds misappropriation.
All brokerage firms that are members of a self-regulatory organization, like the Financial Industry Regulatory Authority (FINRA), must take part in SIPC. Insurance rules may differ depending on your account, so you must understand the regulations governing your account.
SIPC Coverage Details
SIPC protection focuses on helping investors recover their funds if the brokerage firm declares insolvency. If securities are misappropriated, SIPC will also help you to recover your securities or compensate you for losses.
The SIPC does not cover investment losses caused by market declines. It also doesn’t cover losses resulting from hacked accounts unless the hacking results in the brokerage going bankrupt.
SIPC protection is capped at $500,000, including $250,000 in cash coverage. The limits apply per customer and not per account. The SIPC covers consumer funds held in the brokerage account at the time that the broker declares insolvency. This includes investor capital and profit. Cash for commodities trading is not covered.
Brokers are required to hold investor funds in a separate account from their own. Separate accounts protect investor’s money. If a broker goes under, the funds are usually transferred to other broker accounts or returned to the investor. It is only when this process fails that the SIPC must cover losses.
Additional Insurance Options
SIPC insurance coverage has limitations and may not cover all losses. For this reason, some investors seek further protection through private insurance companies. Private insurance can provide broader coverage than the SIPC. Traders can find insurance policies covering investment losses, fraud and other risks.
Private insurance policies are tailored to consumer needs. You can choose the coverage you want and a level of protection that matches your investment strategy.
Many private insurance providers will even offer extra protections, like legal expense coverage to cover disputes or investigations.
FDIC vs. SIPC Insurance
| FDIC | SIPC | |
| Insured Items | Funds held in deposit accounts | Securities and cash held in brokerage accounts |
| Insurance Limits | $250,000 per bank, per legal entity, per account category | Securities insurance $500,000. Cash reserve of $250,000. Where traders hold several accounts, the SIPC determines the protection |
| Payout criteria | Bank failure | Brokerage firm failure |
| How it works | Your deposits are covered up to the limit on the amounts you have deposited at the failed business.\ | The money in your brokerage accounts is covered up to the limit |
| Who has coverage | Individuals with accounts at member firms | Individuals with accounts at member firms |
Risks and Limitations
While investments form a vital part of a capital growth strategy, trading remains a risky business. You always run the risk of financial loss caused by market changes. The value of securities is heavily influenced by economic and socio-political factors.
Most investors take advantage of margin accounts. Though these borrowings can increase profits, they raise the risk of bigger losses. The margin must be repaid, often with interest.
While the government guarantees money held in banks, there is no government guarantee on brokerage accounts. Brokerage charges, like commissions and management fees, can further erode profits.
The extent of your profits or losses depends on your investment strategy, skills and risk management approach. Seek professional advice to reduce the risk of losing money. A well-developed investment strategy that includes risk mitigation tactics and a diversified portfolio will help to spread the risk.
Best Brokerage Firm to Open an Investment Account
The table below contains some of the best brokerage firms for opening an investment account.
- Best For:Active and Global TradersVIEW PROS & CONS:Securely through Interactive Brokers’ website
- Best For:Global Broker for Short SellingVIEW PROS & CONS:securely through TradeZero's website
Protecting Your Brokerage Accounts
Risks abound in the world of investment, so it’s good to know that the funds in your brokerage account are covered in the event your broker goes out of business. This is, however, only one of the risks you face.
Returns can fluctuate, leaving investors out of pocket. The use of a margin account can exaggerate the losses. You must protect yourself. Risk management strategies include the use of private insurance and tools like stop-loss orders, while a diversified investment portfolio spreads the risk.
A financial adviser or broker can help you develop a well-rounded strategy that will help weather market changes.
Frequently Asked Questions
Are brokerage money market accounts FDIC-insured?
Money market accounts are usually opened with financial institutions that are FDIC-insured. Brokers sell money market funds, which are mutual funds and are not FDIC-insured.
Is my money safe in a brokerage account?
Your money is safe up to $500,000 in a brokerage account if the broker participates as an SIPC member.
How much does FDIC insure brokerage accounts?
FDIC does not insure brokerage accounts.
About Anna Yen
Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.