What Will Happen If Your Online Stock Broker Goes Bankruptcy

online stock brokerThe majority of stock’s investors invest through an online stock broker. Knowing which brokerage firm suits your trading style is very important because we all have different styles of trading.

If you’re a stock’s investor and have been trading regularly, you should know how an online stock broker works. In other words, you’re somewhat knowledgeable on how to utilize your broker’s platform for your basic needs.

Stock brokers are in charge of handling transactions for their clients who are investing in the stock market. When a client acquires some shares from a company at a specific price, the online stock broker has the responsibility to find the stock costing the amount that the client is willing to pay per share.

If this broker’s firm is offering full service to its clients, their financial advisers can also research stocks and advise their clients on which one to invest in. Although it’s a good service the fee can be too high for you depending on your account size. Keep in mind that conflict of interest does occur occasionally when you have a full service online stock broker.

One thing that most investors don’t know is what happens if their brokerage firm goes bankruptcy. Even worse, many of them don’t know if brokerage firms can ever goes bankruptcy.

What will happen if your online stock broker goes bankrupt?

In the early years investors used to lose all their shares and funds in their brokerage account when bankruptcy hit home. That’s a very terrible thing to ever have to deal with, not only they would lose their money plus shares, they would be left in the dark and not being able to take any action against that unfortunately.

Securities Investor Protection Corporation (SIPC) was created in 1970 to protect investors against the loss of funds and securities in the stock trading market.

The Securities Investor Protection Corporation (SIPC) had its origins in the difficult years of 1968-70, when the paperwork crunch, brought on by unexpectedly high trading volume, was followed by a very severe decline in stock prices. Hundreds of broker-dealers were merged, acquired or simply went out of business. Some were unable to meet their obligations to customers and went bankrupt. Public confidence in the U.S. securities markets was in jeopardy.

The SIPC ensures that we don’t loose our investment if our brokerage has to go bankrupt. However, this protection is limited.

What do I mean by it being limited? SIPC will restore the current  securities and cash that were in the account prior to the brokerage being gone bankrupted.

Meaning that you’ll receive only what you have left on the last day before the crash. If the shares you owned have gone down in value that’s exactly the equivalent you’ll get back. Very importantly, your brokerage has to be a member of SIPC in order for you to be qualified.

How much of your securities will be covered by SIPC?

There’s definitely a limit to how much of your portfolio that will be covered. SIPC will protect your account to up to $500,000. This amount is also included a limit of $250,000 in cash. If your portfolio is worth more than $500,000, you’ll be losing.

According to this corporation though, “SIPC protects cash in a brokerage firm account from the sale of or for the purchase of securities. Cash held in connection with a commodities trade is not protected by SIPC.” Don’t think that if you leave your cash on there you’ll get it back in the case where something goes wrong.

SIPC covers anyone’s portfolio as long as their brokerage is a member. It doesn’t matter where you live, country-wise, the only thing that you should care about is if your brokerage is a member of SIPC.

How to ensure that your securities are safe?

Since all brokerage aren’t part of this protection Act, I’d make sure that my brokerage is a member. You have the right to ask questions if you have to, and they’ll be more than happy to answer your questions.

If you don’t yet have an online stock broker, this should be your first question to ask____Are you a member of SIPC?

You’ll want to know that your money will be safe in case the brokerage goes bankruptcy. If you can’t ask you can also conduct a little research first to find out. You should be able to find that somewhere within their website.

Overall

A stock brokerage firm can definitely goes to bankruptcy. Although it’s not something that you hear about too often, it’s a very possible thing.

Not only they’re able to go bankrupt they can also close without any notice which would be very scary to investors. Therefore, you have to know whether or not your brokerage is a member of SIPC. That’s the only way you can be sure that your securities are covered and safe.