Whenever you invest your money, you should take a moment to ask yourself: what would happen if there’s a disaster? That’s the thinking behind home insurance–buying a house is a
huge investment, and we want to know that if something so bad happens that the house no longer exists, we’ll be able to recoup at least some of that investment.
The FDIC, a government agency, functions in a similar way, except instead of insurance on your home, it’s insurance on the money you have in the bank. That is, if your bank goes out of business, you won’t lose the money you had invested there (up to a point–there are limits on how far FDIC insurance extends).
But what about investments you have in financial organizations that aren’t banks? In 1970, the government addressed this issue by creating the Securities Investor Protection Corporation, or SIPC. When broker-dealers become protected by the SIPC, they effectively buy insurance so that if they go bankrupt, their investors will be able to recoup their money, up to $500,000.
It’s important to note that SIPC coverage doesn’t kick in if investors simply lose money because their investments decrease in value. But it’s a great way to make sure that investors aren’t left holding the bag if their broker goes under.