What is SIPC? Is the safety of U.S. stock brokers assured? How does the Securities Investor Protection Corporation protect investors? Up to a maximum coverage of $500,000!

Many investors opt to directly open accounts with overseas brokers for trading on the U.S. stock market, mainly because major U.S. brokers are currently promoting low or even zero commission fees, which attracts a multitude of investors. Some of you may wonder about the safety of transferring money to the United States. Concerns may arise about the security of U.S. brokers and the potential for exchange rate losses. You might find the process of depositing and withdrawing funds cumbersome and be unsure about the best way to proceed. In this series of articles, we will guide you to gain a deep understanding of the safety of U.S. brokers, the differences in currency exchange when investing in U.S. stocks, and step-by-step instructions for depositing and withdrawing funds in the U.S. stock market. Let's embark on this journey into the world of U.S. stocks together!

Is the safety of U.S. stock brokers assured?

The regulatory mechanism of the U.S. stock market is quite stringent. The SEC (U.S. Securities and Exchange Commission) is a government agency responsible for overseeing the market and protecting investors. It aims to maintain a fair and efficient market, closely monitoring activities such as insider trading and financial fraud. Due to its robust regulatory framework and increased transparency, the SEC contributes to creating a friendly investment environment. Additionally, approximately 80% of participants in the U.S. stock market are professional investment institutions, helping to maintain rational market fluctuations. Compared to individual investors, this kind of market is considered more fair and stable.

Recently, many of you may have been paying attention to the news about the closure of the cryptocurrency exchange FTX. It's natural to wonder about the safety of the U.S. stock brokers we commonly use and whether there is a risk of them closing down. In fact, the United States has numerous large-scale brokers, and the probability of them closing down is very low. Moreover, these brokers are insured, so in the unlikely event of closure, users would be compensated with at least $100,000. This protection is provided by the SIPC, the Securities Investor Protection Corporation.

What is SIPC?

• The History of SIPC:

SIPC was established in 1970 as a non-profit, unofficial organization of securities brokerage members. Its goal is to prevent investors from suffering losses due to brokerage closures. When a brokerage is a member of SIPC, investors can receive protection. SIPC stands for Securities Investor Protection Corporation in English, with the full name being "Securities Investor Protection Corporation.

• SIPC Protection:

The establishment of SIPC is to protect the clients of its member securities trading companies. When a brokerage firm goes bankrupt or undergoes liquidation, SIPC intervenes to safeguard the assets of investors. Different compensation outcomes exist for varying amounts and situations. Compensation can be provided in the form of cash or asset transfers. Taking IBKR (Interactive Brokers) as an example, this brokerage is a publicly traded company and the largest global online broker. The insurance coverage for an account is $500,000, including $250,000 in cash and $250,000 in securities.

• How to check if the trading platform I use is covered by SIPC:

SIPC has over 4,000 members in the United States, and the list includes commonly used trading platforms, all of which are protected by SIPC!

• TD Ameritrade
• Interactive Brokers
• Firstrade
• Charles Schwab
• eToro

If readers want to check whether the trading platform they use is on the SIPC member list, it's very simple. Just go to the SIPC official website, search by the first letter of the brokerage's name, or enter the full name of the brokerage for a search. This process is quite convenient.

For example, if you want to find Interactive Brokers , you can directly enter "Interactive" for the search, as shown in the illustration.

How does SIPC provide protection?

• SIPC's protection is for customers of member trading platforms, namely, investors who use brokerage services. In the event of bankruptcy of an overseas brokerage and the liquidation of assets, the remaining assets of the company will first be used to compensate the original customers, i.e., investors. If the returned funds are insufficient, the protection mechanism will be triggered. The single protection limit provided by SIPC is $500,000, including $250,000 in cash and $250,000 in stocks. All eligible customers of member brokerages are entitled to file claims.SIPC is established under federal law and supervised by the Securities and Exchange Commission (SEC). However, it is neither a government agency nor the regulator of securities brokerage firms. SIPC's purpose is to expedite the liquidation of failed investment and securities brokerage firms, facilitating the quicker recovery and return of lost customer cash and assets. SIPC has recovered billions of dollars for investors.

• As long as the investor's trading platform is a member of SIPC, both the securities held on that platform and the assets used to purchase securities will be protected. Here, 'securities' refers to the definition in the Securities Investor Protection Act. The following are common types of securities as defined by the Act:

• Of course, not all tradable assets are covered by SIPC. What types of assets are not within the scope of SIPC protection?

Details of SIPC Claims for Investors in U.S. Stocks

• Claim Deadline: SIPC claims must be filed within six months. Beyond this timeframe, SIPC has the right to deny compensation for related losses.
• Claim Processing Time: According to SIPC, it is possible to receive the entire or partial assets within 1 to 3 months. If the individual claims for each customer of the bankrupt brokerage do not exceed $250,000, the claim process will not involve the court (the protection limit is $500,000, with a cash protection limit of $250,000).
• Nationality Protection: Even non-U.S. investors opening accounts with SIPC member brokerages can receive protection from SIPC.

Conclusion:

Recently, many of you may have been following the news about the closure of the cryptocurrency platform FTX, leading to concerns about the safety of the stock brokerage platforms we use in our daily lives.

Indeed, investing comes with risks, and there is always a possibility of brokerage failures. To minimize unnecessary risks, it is crucial to investigate whether a trading platform is a member of SIPC before choosing to trade. Generally, as long as investors choose well-established brokerages, they are likely to be SIPC members. I recommend readers not to expose their trades to various risks due to excessive misinformation in advertisements. Protect your assets and make informed decisions!

Updated February 16, 2024 08:04