As investors, you should be familiar with various ways of investment. If you are now investing through a brokerage account, then you have to understand securities investor protection corporation (SIPC).
Investing through a brokerage account means your shares are in ‘street name’. In other words, your brokerage firm technically owns your shares.
Thus, if it goes bankrupt, you will lose all of your assets, without SIPC protection.
When SIPC involves?
it comes when a brokerage firm fails to owe customers cash and securities that are missing from the customer’s account. At that situation, SIPC usually asks a federal court to appoint a trustee to liquidate the firm and protect its customers.
While for smaller brokerage firm failure, SIPC usually directly deals with customers. However, it does not protect investors from losses.
For instance, if you own 500 shares of the Coca Cola before the bankruptcy, then you will only get 500 shares of the Coca Cola in the new brokerage account. You are free to choose the institution after the SIPC sort the bankruptcy.
What are the investments protected by the SIPC?
It protects cash and securities, like stocks and bonds, own by customers in a financially troubled brokerage.
On the other hand, the investments that are ineligible for SIPC protection is a commodity futures contract, currency, and an investment contract.
Who are eligible for SIPC help?
It aids most customers of brokerage firms whenever assets are missing from customer accounts.
Also read: Hipsturbia, a Trend in the Future Property Investment
How does SIPC help?
Customers will get back all securities, like stocks and bonds, registered in their name or are in the process of being registered. After this first step, SIPC divides the firm’s remaining customer assets on a pro-rata basis with funds shared in proportion to the size of claims.
If the fund is insufficient, then the reserve funds of SIPC are used to supplement the distribution.
