You know that the FDIC protects your bank deposits from bank failures. You may also know that the SIPC (the Securities Investor Protection Corporation) protects your brokerage accounts from brokerage failures. (Yay!) The SIPC doesn't cover as much as you think, though, which is why there's movement afoot to broaden its power.
If your brokerage goes out of business and it was an SIPC member, your losses are covered by up to $500,000 (and up to $250,000 for cash in your account). For many people, that's not enough, which is why some good brokerages offer their customers additional protection. Schwab
A broader scope
That $500,000 limit is being questioned, as it hasn't been increased since the agency's founding in 1970. If it's raised, some insurers might lose money, while brokerages may save money. But more interesting is this: The SIPC is being asked to protect investors not just from brokerage failures, but also from fraud. The Securities and Exchange Commission recently told the SIPC to cover those who lost money in a massive fraud allegedly conducted by financier R. Allen Stanford. This is unusual, and the SIPC hasn't even agreed to do so. It will issue its decision in September, and the SEC is ready to take the matter to court.
This might turn into an interesting slippery slope. For instance, there have been allegations that wireless-broadband provider Clearwire
The investing arena will be a lovelier place with such protections, but don't hold your breath. There may be an initial incremental broadening, but that will come at a cost. And further widening would be costlier still, in an environment where the government is looking to trim spending.
In the meantime, remember that if your brokerage fails, the SIPC has your back -- to a degree. But if a stock fails you, you're usually on your own. Still, it can't hurt to find and use the best brokerage you can find, for maximum protection.
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Longtime Fool contributor Selena Maranjian owns shares of Lloyds Banking Group, but she holds no other position in any company mentioned. Check out her holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Charles Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.