The Federal Deposit Insurance Corporation (FDIC) only protects banking accounts, so no direct federal insurance exists to protect brokerage accounts. The good news is that your brokerage account is likely protected by the Securities Investor Protection Corporation (SIPC). While the SIPC does not provide the same blanket protection that the FDIC provides to bank account holders, the SIPC gives brokerage customers a defense against failure or fraud.

The SIPC protects customers of failed brokerage firms. Almost all brokerage firms in the United States are members of the SIPC. When a firm fails, the SIPC helps coordinate the selling of the brokerage’s assets to pay customer claims. The SIPC will generally ask a court to appoint a trustee to supervise the brokerage firm’s liquidation and to process all claims. If the assets of the firm are insufficient to cover all claims, the SIPC will cover any shortfall up to $500,000, including $100,000 for cash claims.

Most investments are covered by the SIPC, although a limited number of investments, such as partnerships and currency contracts, are not. The SIPC also does not protect brokerage customers from bad investments or from stocks that have dropped significantly or become worthless. The SIPC will cover investors for unauthorized trades as long as the investor can demonstrate the trade was unauthorized, usually through a paper trail.

Utilizing a brokerage firm that is a member of the SIPC is important if you wish to utilize SIPC protections. The SIPC will not help customers of non-member brokerage firms. Make sure the brokerage firm you utilize states it is a “Member, SPIC” in order to ensure that your account is covered. The SPIC also maintains a list of valid members at their Web site, www.sipc.org/who/database.cfm.