Investing in the stock market can be a great way to grow your wealth. But before you decide to open an account with a brokerage firm, it's important to verify that the firm is safe to do business with. There is always risk in investing, so nothing can guarantee you don't lose money when buying a stock, but purchasing a stock through a shady brokerage firm can add even more risk of losing your hard-earned money. Here's what you should look for before choosing a brokerage firm.
What is a brokerage firm?
A brokerage firm is a professional service provider that acts as an intermediary between buyers and sellers of financial products such as stocks, bonds, and mutual funds. Some full-service brokerage firms provide advice on which securities to buy or sell as well as offer financial planning services.
Some are DIY brokerages, like Robinhood, that only act as a go-between for you and a stock exchange, providing no personalized advice or services. They often provide research, trading capabilities, and investment tools. These are often known as discount brokerages and many, like TD Ameritrade, have brick-and-mortar offices too. Some discount brokerages are only online, like Webull.
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While investors can make or lose money based on what they invest in, what happens if the brokerage firm itself fails or goes bankrupt? There are ways to ensure your money is protected if that happens, which is why you should always check on a brokerage firm's SIPC membership.
Ensure SIPC membership
The Securities Investor Protection Corporation (SIPC) is a nonprofit organization that provides protection for investors who have lost money due to broker insolvency or theft. Created in 1970, it's funded by member firms and overseen by the United States government. Similar to the FDIC for banks, the primary purpose of SIPC is to protect the interests of investors when their brokerages fail financially or there is theft involved. It does this by providing each customer coverage of up to $500,000 for securities and $250,000 for cash.
It is important to understand that SIPC does not cover any stock market losses or market volatility. And unlike the FDIC, it is not a federal agency. The SIPC also only covers broker fraud, not fund fraud, so you still have to be careful about what you invest in. A brokerage firm that is an SIPC member will have the SIPC logo, but it's a good idea to call SIPC or visit their website for a list of members to verify.
This is important because in 2022 multiple crypto platforms (including Sam Bankman-Fried's FTX) misled investors by stating their accounts were FDIC insured. Voyager, a cryptocurrency lender that went bankrupt in 2022, was accused of making false and misleading statements about its FDIC deposit insurance status on its website, mobile app, and other marketing materials. Unfortunately, anyone who opened an account with Voyager believing that FDIC would have protected its deposits were expected to only receive about half of their money back.
Check with the Financial Industry Regulatory Authority (FINRA)
In addition to SIPC, you should check with FINRA, an independent regulatory organization that helps protect investors from fraud or theft. You'll be able to see a list of complaints against your brokerage. All brokerages must also register with FINRA and provide details about their business activities and financial standing. This information can be found on FINRA's BrokerCheck website.
Research the company's history
It's also important to research the company's history. How long have they been in business? What types of investments do they specialize in? What services do they offer? Where are they based out of? Doing some background research will help you get a better understanding of who you're working with and whether they are legitimate.
Read reviews or testimonials
Another great way to verify that a brokerage firm is legitimate is by reading reviews and testimonials from customers who have used their services in the past. Many customers are willing to share their experiences online so that others can benefit from their knowledge before making a decision about which brokerage firm they should use. Reviews will give you insight into how reliable and trustworthy the company is, as well as how satisfied past customers have been with their services.
Investing can be an effective way to grow your wealth, but it's important that you do your due diligence before signing up with a brokerage firm. Taking steps such as ensuring SIPC membership, checking FINRA records, and learning more about the company will help ensure that your money is safe and secure in their hands. With these tips in mind, you should feel confident when choosing a brokerage firm to suit your needs and help you meet your financial goals.
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BrokerCheck is a free tool from FINRA that can help you research the professional backgrounds of investment professionals, brokerage firms and investment adviser firms.
or call FINRA at (800) 289-9999. Or, visit the SEC's Investment Adviser Public Disclosure (IAPD) website. Also, contact your state securities regulator. Check SEC Action Lookup tool for formal actions that the SEC has brought against individuals.
Brokerage firms that are members of the Securities Investor Protection Corporation (SIPC), which includes most brokerages registered with the Securities and Exchange Commission (SEC) insure your account for up to $500,000 should your brokerage go out of business.
Typically, when a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) arranges the transfer of the failed brokerage's accounts to a different securities brokerage firm. If the SIPC is unable to arrange the accounts' transfer, the failed firm is liquidated.
Stable earnings, return on equity (ROE), and their relative value compared with those of other companies are timeless indicators of the financial success of companies that might be good investments.
Visit FINRA BrokerCheck or call FINRA at (800) 289-9999. Or, visit the SEC's Investment Adviser Public Disclosure (IAPD) website. Also, contact your state securities regulator. Check SEC Action Lookup tool for formal actions that the SEC has brought against individuals.
There are several ways to check and see if your broker is legit. Always do your homework beforehand. Check the background of the firm and broker or planner for any disciplinary problems in the past, beware of cold calls, and check your statements for funny business.
Bottom line. The SIPC is a federally mandated, private non-profit that insures up to $500,000 in cash and securities per ownership capacity, including up to $250,000 in cash. If you have multiple accounts of a different type with one brokerage, you may be insured for up to $500,000 for each account.
SIPC protects against the loss of cash and securities—such as stocks and bonds—held by a customer at a SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.
Based on their assets under management (AUM), the biggest four brokerage firms in the U.S. are Charles Schwab, Vanguard, Fidelity, and JP Morgan. Below is a short analysis of each brokerage's products, services, and fee structures as of July 2024. They are listed in no particular order.
Broker-dealers, like all businesses, live in a world of risk – operational risk, legal risk, reputation risk, managerial risk, credit risk, among oth- ers.
Brokerages tend to offer lower annual percentage yields (APYs) on savings, money market and interest checking accounts than the best online banks. Brokerages typically don't have cash-handling employees in brick-and-mortar locations. Brokerage accounts don't offer all the services that a traditional bank offers.
Type a financial professional's name in the box and you will be re-directed to the Investor Adviser Public Disclosure (IAPD) website. There you can find out if your investment professional and his/her firm is licensed with the SEC, with a state(s), and/or with FINRA (the Financial Industry Regulatory Authority).
If everything that has been invested in the company is from your own funds, and therefore any loss by the company comes out of your own pocket (and is not covered for you by someone else), then it is likely that all of the investment is at risk.
Start with your broker's website: A legitimate broker should transparently display its regulatory status on its website. This includes the names of regulators overseeing its operations and license number(s). This data is typically found at the bottom of the broker's website.
BrokerCheck gives you a snapshot of a broker's employment history, regulatory actions, and investment-related licensing information, arbitrations and complaints. Want more information? Browse the list of brokers barred by FINRA.
Through its Complaint Program, FINRA investigates complaints against brokerage firms and their employees. FINRA is empowered to take disciplinary actions against brokers and their firms. Sanctions may include fines, suspensions, a barring from the securities industry or other appropriate sanctions.
Check their track record, client reviews, and industry standing. – Regulatory History: Investigate any regulatory actions or compliance issues. The Financial Industry Regulatory Authority (FINRA) can provide valuable information. – Technology and Platforms: Evaluate the technology and platforms they offer.
Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.
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