IS YOUR MONEY FDIC INSURED WITH AN ONLINE BROKER?
When you are just getting your investing career off the ground and learning how to buy stocks, you might not have a whole lot to invest. But as you grow older, you will hopefully start to accumulate savings and want to make sure everything is as secure as possible.
Investing in stocks is NOT safe as you most likely know. When your money is in stocks, it can go up or down and it is NOT covered by FDIC insurance. This is one of the first things any beginner needs to learn and fully understand.
But what about all the money (cash) you have in your online broker account that is not in the stock market?
Whatever amount of money you have in your online broker account, chances are that it is not all in stocks. After all, when you sell a stock, the money has to be put somewhere and that is usually in some kind of money market account. With E*Trade it is put in a “sweep deposit account” which is just a fancy name for a money market account and that money IS insured with through FDIC.
As you may know though, FDIC insurance only covers the first $250,000 in any account. It was actually much lower at $100,000 per account just a few years ago but the amount was raised as it should have been because today’s dollar isn’t what it used to be due to inflation. So, any amount you have in “cash” in your broker account is only insured by FDIC up to $250,000 which can present a problem if you have more than that.
With E*Trade (I’m not sure about other online brokers) they have a very nice feature with their sweep account where your money is actually guaranteed up to $1,250,000 because they deposit your cash into 5 different depository institutions. 5 X $250,000 = $1,250,000. As many investors who buy stocks over a lifetime end up with much more than $250,000, that is very convenient so that a person doesn’t have to go out and open multiple accounts all over the Internet just to stay under the $250,000 FDIC amount.
Another reason this may be important is on the off chance that your online broker goes bankrupt. In that situation, the money you have in individual stocks and funds is safe because your broker doesn’t own those stocks, you do. The remainder of the money you might have in cash or other investments with your broker would be insured up to that $250,000 mark and maybe even more if your broker has the sweep account deal similare to the one E*Trade has.
