There are several ways to hold your investments (for more information, read all about investment holding methods). Most ordinary investors own their stocks, bonds, mutual funds, and other securities through their brokerage accounts. The result is that the firm itself technically owns the stock and holds it on behalf of their clients. If and when a brokerage firm goes bankrupt, without protection from the SIPC, the clients would lose all of their assets and be wiped out despite the businesses they held, companies such as Coca-Cola or Berkshire Hathaway, being perfectly fine. Stock certificates, on the other hand, can be lost in addition to being a hassle to register, put in a safe deposit box, turn back in upon sale, and re-register to the new owner. Knowing this, the government created the Securities Investor Protection Corporation – the SIPC for short – in 1970 through Securities Investors Protection Act. It is not an agency of the Federal government, but instead a member institution where each of the financial institutions that are a part of it pay in to the system.
The SIPC does not protect investors against losses from their investments. All it does is replace many of the investments held in their account if their broker or financial institution goes bankrupt. That’s it. If you owned 500 shares of General Electric prior to a bankruptcy, all you’re going to get is 500 shares of General Electric in a new brokerage account at the institution of your choice after the bankruptcy is sorted out by the SIPC staff. It’s that simple. In the meantime, GE might be up, it might be down, or it might have gone nowhere.
