The Securities Investor Protection Corporation (SIPC) is undoubtedly one of the key institutional actions in the U.S. taken to achieve the common objective of safety of investors. In terms of learning how SIPC works, the determination of this is required by anyone who wants to bewards off from any threats on your investment portfolios through feeling secured.
As the first SIPC was established in 1970, the institution is primarily responsible for the implementation on the law that requires it to protect investors of brokerage firms that are reported with financial distress or bankruptcy. SIPC is similarly to FDIC; or to put it more bluntly, FDIC is not an insurance program.
In a nutshell, the key role of SIPC is to provide an insurance to a securities customer’s cash and securities that are in the account belonging to a securities firm. With the brokerage banks’ bankruptcies the SIPC takes over and gives back a share of the clients’ security holdings up to a specific limit and cash in cash up to the specified amount.
These securities are stocks, bonds and mutual funds, which SIPC will help the investor to avoid being embarrassed since the guarantees are provided instead of leaving the investors helpless when the brokerage firm headers collapse. It is indispensable for SIPC to remind that this insurance is not full. It is indemnity that applies only to the loss of your stocks or bonds.
The insurance coverage provided by SIPC in very clear. That is, an individual customer is protected up to $500,000 and cash up to $250,000. It marks the beginning of securing and maintaining the investor confidence from happening. Hence crises are prevented.
The SIPC protection would then be a great safety-net, but it should not be considered as the absolute all and end-all of the investment world (because SIPC has some built-in buffers attempting to protect against fraud, poor advice or roller-coaster market trends). It have great synergey with other investor protection schemes and programs.
