SIPC, FDIC and What Is Actually Protected
Account protection covers the failure of the firm holding your assets. It has never covered the possibility that an investment loses money.
MadStockAlerts Research · Updated August 29, 2026
What to take away
- SIPC covers the failure of a brokerage, up to stated limits, not investment losses.
- FDIC covers bank deposits, which is a different thing from a brokerage account.
- Securities are generally held in custody separately from the firm's own assets.
- Neither scheme covers a decline in the value of anything.
- Coverage limits apply per separate capacity, not per account.
MAD Academy Training Video · 0:45
It Covers the Broker Failing, Not the Market
SIPC protects against your brokerage disappearing. It offers nothing at all against your investments falling.
This lesson is part of a Stock Alerts + Tools plan.
What each scheme is for
| SIPC | FDIC | |
|---|---|---|
| Covers | Customers of a failed brokerage | Depositors at a failed bank |
| Applies to | Securities and cash held at the firm | Deposit accounts |
| Limit | $500,000 per customer, of which $250,000 for cash | $250,000 per depositor, per bank, per ownership category |
| Does not cover | Any decline in the value of an investment | Investments, including those bought through the bank |
The fourth row is the whole of the misunderstanding these schemes attract. Neither is insurance against a bad investment. They exist so that the failure of the institution holding an asset does not become the customer's loss of that asset.
Why securities usually survive a failure
The protection scheme is the backstop rather than the primary mechanism. The primary mechanism is the customer protection rule, which requires a broker to segregate customer securities from its own and to maintain reserves against customer cash.
In practice this means the securities in an account are not the broker's property and are not available to its creditors. When a firm fails, the usual outcome is that customer accounts are transferred to another firm largely intact, and the protection scheme covers shortfalls rather than the whole balance.
The margin agreement is an exception worth knowing. Securities pledged as collateral for a margin loan are subject to the lender's rights, which is one of several ways a margined account differs structurally from a cash one.
What is outside the coverage
- A decline in the value of any security, for any reason, including fraud by the issuer.
- Commodity futures and most currency contracts, which sit outside the securities regime.
- Investment contracts and notes that were never registered as securities.
- Assets held at an unregistered firm, since coverage applies to members of the scheme.
- Cryptocurrency held at a platform that is not a registered broker-dealer.
The fourth and fifth items are the ones that recur in enforcement actions. A firm describing itself as protected is making a claim that can be checked directly with the scheme, and an unregistered firm is outside the scheme regardless of what its marketing says.
How the limits are counted
The limits apply per customer in each separate capacity rather than per account, which means opening several accounts of the same type at the same firm does not multiply the coverage.
| Situation | Treated as |
|---|---|
| Two individual accounts at one firm | One customer, one limit |
| An individual and a joint account | Separate capacities, separate limits |
| An individual and a retirement account | Separate capacities, separate limits |
| Accounts at two different firms | Separate, since the coverage is per firm |
Some firms carry additional private coverage above the statutory limits, which is a commercial arrangement rather than part of the scheme, and its terms are the insurer's rather than the regulator's.
What happens when a firm actually fails
The process is defined and has been used. Understanding the sequence removes most of the anxiety attached to the topic, because the ordinary outcome is far less dramatic than the coverage limits imply.
- 1The firm failsThrough insolvency, a regulatory action, or an inability to meet its obligations.
- 2A trustee is appointedTo take control of the firm's books and customer accounts.
- 3Accounts are transferredIn most cases, whole accounts are moved to another broker, usually within weeks.
- 4Shortfalls are coveredThe protection scheme covers gaps between what customers are owed and what the firm holds, up to the limits.
- 5Claims are resolvedFor anything remaining, through the trustee's process.
The third step is the one that matters and the one nobody expects. Because customer securities are required to be segregated, the usual outcome is a transfer of positions rather than a claim for compensation, and the coverage limits are never reached.
The exception is a firm where the segregation itself failed, which is a fraud rather than an insolvency. Those cases have taken years and have produced partial recoveries, which is why the custody question in the fraud pillar matters as much as the coverage does.