Safety of Brokerage Firms: An Overview
If you're thinking about opening an investment account at online broker, you might have concerns
about how safe these accounts are. This article discusses the security measures at brokerage
companies compared to the protections at U.S. banks.
What Are The Safest Brokerage Firms?
Legitimacy of Brokerage Firms
Almost all online brokerage firms are entirely legitimate. In fact, a few are owned by
prominent U.S. banks. For instance, Merrill Edge is owned by Bank of America, one of the planet's
biggest financial organizations. Other broker-dealers that do not partner with banks have been
active in the brokerage industry for many years. For example, Fidelity began in
1946.
Brokerage Account Coverage
The Federal Deposit Insurance Corporation (FDIC) backs deposits in U.S. banks, but it does
not insure brokerage accounts. Online investing is seen as a separate field,
governed and overseen by other entities.
The Securities Investor Protection Corporation (SIPC) is a Congress-created group supported by
member broker-dealers. It provides coverage for assets like stocks, bonds, ETFs,
options, and mutual funds, up to $500,000 per account. This figure is actually twice the coverage normally available for FDIC-insured bank deposits. Under SIPC rules, up to half of the $500,000 coverage can apply to uninvested cash balances.
A crucial difference between SIPC and FDIC is worth noting. While FDIC protects the money you deposit, SIPC protects the share count in your trading account.
Let's clarify with an example: Imagine you put $500 into an FDIC-insured checking account. If the bank fails, the FDIC covers the $500, and the U.S. government pays you back.
Now, suppose you move that same $500 into a brokerage account and purchase five shares of a stock at $100 each. If the brokerage fails, SIPC protects those five shares, but it does not guarantee their market value. If the stock becomes worthless, your account will be worthless as well, even with SIPC coverage.
Hence, a major difference between banking and investing is that
investments can go up or down, while bank deposits have a stable value. Thus, securities accounts carry higher risk than bank accounts.
The Most Secure Brokerage Accounts
Robinhood and
Charles Schwab are well-known
businesses that have never needed government rescue and are viewed as safe choices for opening
both taxable brokerage or retirement accounts.
Robinhood Special Offer
Charles Schwab Special Offer
Technology Security
All online brokerages naturally provide trading resources for do-it-yourself clients.
These include basic websites, more advanced sites, mobile apps, and even smartwatch tools. Some brokers also offer desktop platforms with different levels of features.
Online brokers must protect your private data, just like other companies. When you provide your details online, they are sent through an encrypted network. You can confirm the site's security and encryption by looking for the padlock icon near the website's URL.
Brokerage firms work to shield your personal data, but they have been
targeted by cybercriminals before. Still, these events do not necessarily mean online brokerages are less secure than other financial groups. Criminals have attacked many computer systems, as we saw with the Equifax data breach.
Various Securities Have Different Risk Levels
If you are new to investing and worried about protecting your capital, you can
begin with securities that are seen as safer. For example, large-cap stocks with
a long record of paying dividends are usually less risky than small-cap stocks with no dividend track record. Established blue-chip shares are generally more secure than new, untested stocks.
Investments like mutual funds and ETFs are often safer than single stocks because they contain a mix of stocks and bonds. By spreading holdings across numerous assets, funds reduce the likelihood of a major drop (though they also limit possible big gains).
Bonds are often viewed as safer than stocks because their face value is fixed. Consequently, bond prices are typically steadier than stock prices.
Yet not every bond is alike. Some bonds have high credit scores (AAA), while others are below investment grade, labeled as "junk" with ratings under BB+. In general, short-term bonds carry fewer risks than long-term bonds.
Instead of buying individual bonds, you can invest in bond funds, which include various debt instruments in their holdings. The safest bond funds hold top-rated, short-term bonds.
You can purchase all these and more through American online brokers. The main point is to really understand what you're buying for maximum safety.
Professional Money Management
If you are still uneasy about making your own trades, you can pay a licensed expert to oversee your account. Many online low-cost brokers have this option. The people running these accounts are supposed to be certified finance professionals, but it is always smart to confirm their qualifications before you proceed.
Because of the push for lower costs, some discount brokers have built automated programs that handle investment choices. These robo-advisors can charge as little as 0.00% a year (yes, $0) of your account's balance.
Summary of the Safest Brokers
You can feel secure about opening a brokerage account and making your first trade. It's
essential to pick a broker that belongs to SIPC and FINRA, the main regulators, to protect
your investments.
Updated on 3/13/2025.
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