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It was only a few years ago when most people did not know that they could invest in US stocks from India. However, things are very different today. Indians want to invest in the Apples, Teslas, and Amazons of the world. Technology has made it possible to invest in US stocks in an easy and convenient manner. One of the key concerns when one invests their hard-earned money is: Is my money safe? If you have similar concerns, it is important to know about SIPC insurance and how it works. Let’s take a look.
What is SIPC insurance?
SIPC stands for Securities Investor Protection Corporation. By law, brokerage firms are required to keep their funds separate from their clients’ funds. Brokerage firm failures are a very rare occurrence, but in the event that it happens, customers are protected by SIPC insurance. This means that if a brokerage firm were to fail and a customer’s money goes missing due to fraud, theft, or unauthorized trading, the customer would be covered for the loss. With SIPC insurance, there is no requirement that the investor is a resident of the US. A non-US citizen receives the same treatment as a US citizen. Therefore, Indian investors or NRIs are also protected by SIPC.
How does SIPC work?
SIPC is a non-government agency. This means that it does not have the authority to investigate any incidence of fraud at brokerages. That would be handled by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commissions (SEC).Should a brokerage fail, SIPC initiates the liquidation process only when it receives a referral from either the SEC or FINRA. Such a referral is made when there is a failure of a brokerage firm, and cash and securities are missing from the customers’ accounts. When a brokerage is liquidated, SIPC divides its assets among the investors, and when that is used up, it uses its own funds.
What is the SIPC insurance limit?
If your brokerage firm fails and when the liquidation begins, SIPC protects the cash and securities in your brokerage account of up to $500,000. This includes $250,000 in cash in your brokerage account to buy securities. This cash needs to be held by the broker in connection with the customer purchasing US securities. You must file a claim to receive protection from the SIPC. Read here to learn more about the claims process.
Things to keep in mind
You need to remember that there are a few conditions that need to be fulfilled for an investor to receive SIPC protection. First, your brokerage firm needs to be an SIPC member. Most brokerage firms in the US are required to be SIPC members. To find out if your brokerage firm is a member of the SIPC, check here.
Vested’s brokerage partner, DriveWealth, is a member of SIPC, so your investments via the Vested platform are protected.
SIPC does not provide protection in the event of a decline in the value of securities
Investments in the stock markets are subject to fluctuations and an investor can lose money on their investments. SIPC protects you only in case the brokerage firm fails, it does not protect against market risks that are associated with investing. This means that SIPC will not bail you out when the value of your stocks or bonds falls due to any reason. You are not protected against any promises of investment performance. Also, you are not protected if you have been given bad investment advice or sold inappropriate investments. Commodities or futures contracts also do not fall under the ambit of protection.
Now, you know that your investments in US stocks are in safe hands. Remember to do proper due diligence before investing.
