Is my money safe in a brokerage account?
Yes. It’s highly unlikely that your brokerage will go bankrupt.
If a brokerage does fail, it is highly likely that another firm will buy that firm’s assets and accounts. Then your stocks & shares would be transferred with very little interruption.
Failing that, the court appoints a trustee for the brokerage, and you’ll be notified of the transfer of accounts. You can continue with the assigned broker or move to the brokerage of your choice. In that case, the only loss would be a few hours of your time.
The next line of protection is an insurance provided by the US government. This is called SIPC (Securities Investor Protection Corporation). They will insure $500,000 of stock, or $250,000 of uninvested cash held in your brokerage account. This insurance will try to recover the value of the investments at the time of the brokerage firm's failure. To claim this, you must file a report.
To protect yourself from this worst-case scenario:
- Don’t hold more than $250,000 of uninvested cash in your brokerage account. Keep any extra in your bank account until you want to make an investment.
- Split your investments so you have no more than $500,000 of stock in any one brokerage.
There aren’t many examples throughout history where a brokerage firm has failed. The SEC exists to protect you and your investments. Better still, it’s meant to side with the investor, not the brokerage.
Note: Selling stocks at a loss is not protected by the SIPC. They exist to recover the value of investments in the case of a brokerage's failure.