This question has been asked and answered online many times. All the answers are either:
They are insured by the FDIC, which covers $500k in assets / $250k cash only.
It is assumed they will be automatically absorbed by a different company that will for sure want to diversify and you are covered.
#2 is a very bad answer. This is not a fact but mere speculation, which makes many assumptions.
#1 is not as simple as it seems. Let’s say Robinhood goes under. What documentation do I have to show I own stocks with them? If they sell my stock to cover their losses and simply erase me from the ledger, then what?
Also I do not understand where is it registered outside the Robinhood app that I bought stock and now own it? (they don’t provide stock exchange paperwork). Maybe they never bought the stock in my name to begin with?
I have a brokerage account with Capital One and see this on the bottom of every page on their site : “Securities and services are: Not FDIC insured · Not bank guaranteed · May lose value · Not a deposit · Not Insured by any Federal Government Agency”
FDIC may apply to your cash balance, but not stocks or mutual funds.
I’ve worked for two major online brokerage firms over the past 12 years and I answered this question frequently during the financial crisis.
What type of assets do you hold at Robin Hood? In general, Securities at brokerage firms are protected by SIPC, Securities Investors Protection Corporation. Now, of course, SIPC can’t guarantee the value of your stock shares. If you own 100 shares of ABC, you’ll get them if something happens to Robin Hood, but of course, the stock price of ABC will fluctuate with the market.
Cash in the brokerage account can be covered in different ways. I’d contact Robin Hood and ask. If it is in a money market, it might be through a bank and covered under FDIC. If it’s just being held as cash, then the SIPC rules would apply.
FDIC would NOT cover brokerage accounts; it is only for accounts at banks. Even if you bought your shares through a bank, they are still not FDIC insured.
SIPC supposedly offers similar insurance for stock brokerage accounts.
However, note what dalej42 mentioned. There will be a delay before the government insurance reimburses you. The delay can be significant (like 12-24 months). And you get covered only for the value of the account at the point the FDIC/SIPC took over. You don’t get any interest or earnings during that delay. You don’t have any chance to react to stock market changes during that time. Your account is just ‘in limbo’ during that delay. And if that causes a cash flow crisis for you, and you have to borrow money at high rates to get by during that problem, too bad – you don’t get compensated for that.
So you get back the book value of the account, at the point the company went bankrupt … eventually.
But FDIC can cover cash in brokerage accounts, if the cash is technically held at a bank. I know, this gets very messy and very confusing quickly.
Now, I’m not at all familiar with Robin Hood, they look like a new start up and so it probably isn’t a place you’re likely to keep extra cash, just the money you’re using for trading. It certainly doesn’t look like a firm that you’re likely to have an IRA at, for example.
I could be wrong, but I was under the impression that YOU own the stocks and the broker just helps you trade them. As opposed to them owning them and just earmarking them for you.
I would think that if they, without your permission sold your stock and kept the money for themselves it would be a criminal matter, and probably separate from them going bankrupt. The fact that they declared bankruptcy may mean that that you’ll never get paid back for the money they stole, but it would still be your money and they’d still be stealing it.
This is one of those things that remind that, while I don’t think Capital One or E*Trade or US Bank or Edward Jones etc are going to go under and take my money with them any time soon, it’s not a bad idea to keep my money at more than one place (which I do).
That’s correct, your stocks are segregated from the brokerage firm’s assets. They can not sell your stocks to cover their losses
The only time the brokerage firm can sell your stocks is if you’re trading on margin and you’re in a margin call or there is extreme risk to your margin debit balance that you owe to the brokerage firm.
The line after that reads “Investment products are offered by Capital One Investing, LLC, a registered broker-dealer and Member FINRA/SIPC.” and if you click on SIPC it takes you to their website where the top banner reads “When a brokerage firm is closed, SIPC steps in and, within certain limits, works to return your cash, stock, and other securities you had at the firm”.
These quotes don’t really agree. May I assume that dalej42’s answer is correct. When the account is settled, I don’t get the value of my account at the time when SIPC took over. I get the shares I had. So if I had 100 shares of ABC worth $50 each then, I don’t get $5000, I get 100 actual shares of ABC. Do I also get any dividends that were paid in the interim?
Is the account managed at all? If I had options in the account that expired in the money, were they exercised for me?
First of all, separate the FDIC from the SIPC in your mind. The first is for banks and was established during the 1930s. The second was created in the 1970s and is for brokerage houses that fail and have screwed up or fraudulent records.
The SIPC also has less moral force than the FDIC, meaning that Congress is less likely to step in should liabilities overwhelm the fund, relatively speaking.
[INDENT][INDENT][INDENT] SIPC protection is limited. SIPC only protects the custody function of the broker dealer, which means that SIPC works to restore to customers their securities and cash that are in their accounts when the brokerage firm liquidation begins.
SIPC does not protect against the decline in value of your securities. SIPC does not protect individuals who are sold worthless stocks and other securities. SIPC does not protect claims against a broker for bad investment advice, or for recommending inappropriate investments.
It is important to recognize that SIPC protection is not the same as protection for your cash at a Federal Deposit Insurance Corporation (FDIC) insured banking institution because SIPC does not protect the value of any security.
Investments in the stock market are subject to fluctuations in market value. SIPC was not created to protect these risks. That is why SIPC does not bail out investors when the value of their stocks, bonds and other investment falls for any reason. Instead, in a liquidation, SIPC replaces the missing stocks and other securities when it is possible to do so. [/INDENT][/INDENT][/INDENT]
Good questions. Here’s a link to how the SIPC claims process works:
[INDENT][INDENT][INDENT] From Step 2 of 6:
In order to be eligible for SIPC protection, you must return a completed and signed claim form to the Trustee within the deadlines set forth in the notice and as described in the instructions. Failure to file a claim within the deadlines may result in the loss of all or a portion of your claim.
When completing your claim form, follow all instructions. In your claim form or on a signed attachment, you should describe the cash and securities that are owed to you by your brokerage firm.* If possible, you should provide any documents that support your claim, including copies of your brokerage statements, trade confirmations, and any correspondence you had with the brokerage firm.* If you complained about the brokerage firm’s handling of your account, you should include a copy of the complaint with your claim form. [/INDENT][/INDENT][/INDENT] Their bolding, my italics.
Robinhood provides some sort of paper trail, right? If they don’t and they go belly up, pioneer victims have the privileged of setting new precedents.
Options in the money will be auto exercised, that has nothing to do with SIPC. The Options Clearing Corporation would handle that. You’d also receive any dividends.
As dalej42 first noted, your assets would be covered by SIPC. I like this discussion from the Financial Industry Regulatory Authority discussing how SIPC protection actually works for customers if a broker closes.