One of the most commonly asked questions by customers in the field of trade. There are only two possible ways an investor may lose his money when he invests it in a brokerage account. One, if an event such as fraud or bankruptcy occurs at the brokerage firm, and two, through investment losses, which are subjected to market risks but is conveniently under your control, provided you have a discretionary basis account which requires client approval for any trade carried by the broker on behalf of his client.
So other than investment losses, one place where customers fear and feel helpless about is the first mentioned scenario, i.e. in cases of bankruptcy or fraud. And in their defense, considering the recent financial crises in 2008, they have a good reason to be worried. Fortunately for the investors, one could say that an investor’s money in a brokerage account is probably much safer with multiple lines of protection than it is in a bank’s savings account.
When a customer deposits his money in a bank, it is common knowledge that the money is never actually lying idle in a safety deposit box, and the bank has already probably loaned it to another customer. Such loans are a risk to any customer with money in his account. That is exactly why, in such cases of a financial crisis, banks are insured by Federal Deposit Insurance Corporation (FDIC), which covers losses up to $250,000 per individual.
But in the case of Brokerage accounts, money once deposited, the investor can be sure that his money is truly lying idle under the firm’s safety, thanks to the federal law that requires that the client’s brokerage account be segregated from the firm’s assets. But what in the case of bankruptcy or fraud? And this is where the Securities Investor Protection Corporation (SIPC) comes in; the SIPC covers losses of up to $500,000 including of up to $250,000 for cash claims. So it is arguably safer to deposit your money in a brokerage account.