Are Your Investments Protected?

THE SIPC

Unfortunately, many investors misunderstand what "investor protection" really means. They often think if their investments lose value, that gives them a reason to file a complaint against their brokers. The truth is that many investors do not fully understand margin accounts, nor the different types of orders. It may be a lot to learn, but making investment decisions is ultimately up to you, and so they are your responsibility. Your broker's responsibility is to execute trades per your request, and their failure to perform that function would be the only time you could point your finger at them.

Prior to opening a brokerage account, you probably have come across a statement stating that your brokerage is a member of the SIPC — at least I hope you have, because you should only open accounts with brokers who are SIPC members. The role of the SIPC is to protect you if your brokerage goes bankrupt. In the event of such a failure, the SIPC will return cash or stocks that you had with the brokerage firm.

But — and this is a pretty big but — in order to recover your assets, it's critical to file a documented complaint. In doing so, you'll receive the value of your assets as of the date that the SIPC formally filed the complaint. But that doesn't mean if you owned securities that lost value you would get back what you originally invested. Not only that; bear in mind only cash and securities are protected. Futures contracts, currencies, investment contracts, and fixed-annuity contracts not registered with the Securities and Exchange Commission are not protected by the SIPC. The word to remember here is "protection," which is not synonymous with "insurance." There is no insurance for stock losses. There is, however, insurance for deposits you have at your bank.

THE FDIC

The Federal Deposit Insurance Corp. (FDIC), an independent agency of the US government, insures most (but not all) banks and savings associations. Those institutions that are insured will display either the acronym or the symbol of the official savings associations, which is an eagle. The FDIC insures up to $100,000 of your deposits at each institution. If you have $60,000 in one institution and $50,000 at another, even though your total exceeds $100,000 the entire amount will be insured, since it is held at two different institutions. It's a safety net. Knowing your money is safe regardless of what happens to your financial institution is certainly comforting.

The FDIC was created to help prevent bank panics and maintain financial stability during the period of a weakening economy. If your bank goes out of business, you can rest assured that your deposits are safe. But just because the FDIC insures your deposits, don't take for granted every deposit is insured.

WHAT IS INSURED

Here's a list of what is insured by the FDIC:

1 Deposits payable in the United States
2 All deposits, such as savings deposits, checking deposits, and certificates of deposits (CDs)
3 Cashier's checks, officer's checks, expense checks, loan disbursement checks, and all other official checks, and
4 Certified checks, letters of credit, and traveler's checks.

WHAT IS NOT INSURED

Here's a list of what isn't:

1 Annuities
2 Mutual funds
3 Stocks
4 Bonds
5 Government securities
6 Municipal bonds, and
7 US Treasury securities.

It will usually be stated somewhere that the FDIC does not insure a specific deposit or investment. But you do have to look carefully, since the fine print makes the statement difficult to identify at a glance.

CONCLUSION

Only open accounts with banks that are insured by the FDIC. Make sure to open brokerage accounts with brokerage houses that are members of the SIPC. But remember, your best defense is your knowledge — know the difference between the two, and be aware of your responsibilities.

Jayanthi Gopalakrishnan may be reached at Jayanthi@Traders.com.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.