Like most people, you probably don’t think much about what would happen if your stock brokerage went bankrupt. After all, stockbrokers are highly regulated, and several safety nets are in place to protect investors. Unfortunately, even the most well-regulated and well-protected businesses can go bankrupt.
If you are investing through Robinhood, this might strike you a lot more times. If you wish to know about it, keep on reading!
What would happen if your Robinhood went bankrupt?
The immediate answer is that your stocks, options, and other securities would be frozen. You would only be able to buy or sell securities once the bankruptcy proceeding was complete.
This could take weeks, months, or even years. In the meantime, the value of your investments would likely plummet as the market reacted to the news.
If you had money in a margin account, you would be subject to a forced sale of your securities. The proceeds from the sales would be used to pay off the debt you owe to your broker.
If you had cash in your account, it would be safe. Brokerage firms must keep the money in a segregated account and would not be affected by bankruptcy. However, it would be tied up until the bankruptcy proceeding was complete.
The good news is that there are investor protection rules in place that would limit your losses in the event of Robinhood’s bankruptcy. The Customer Protection Rule requires broker-dealers to segregate customer cash and securities from the firm’s assets. This rule would protect your money from being used to pay off the firm’s debts.
The rule also requires Robinhood to maintain enough capital to support the risks associated with its business. This is known as the net capital rule, and it is designed to ensure that firms have enough money to meet customer demands in the event of a market downturn or mass withdrawals.
The Securities Investor Protection Corporation (SIPC) will step in if a broker-dealer goes bankrupt. The SIPC is a non-profit organization that protects investors in case their brokerage firm fails. It is similar to the FDIC, which protects bank deposits.
The SIPC does not insure against losses in your investments’ value, but it protects you from losses due to fraud or theft. It also provides for the return of your cash and securities up to a limit of $500,000. Keep in mind that the SIPC does not cover losses due to market fluctuation or poor investment decisions.
Things to keep in mind:
If you’re concerned about the possibility of your broker going bankrupt, there are a few things you can do to safeguard your investments.
- Consider investing with a large, well-established firm. These firms are more likely to weather a financial crisis and are less likely to engage in risky behavior.
- Diversify your investments. Don’t put all your eggs in one basket. This will help to protect you if one particular investment goes sour.
- Monitor your account regularly. Check to see that your cash and securities are properly segregated. Contact your broker immediately if you see anything that looks out of the ordinary.
No investment is entirely risk-free. However, by diversifying your investments and monitoring your account, you can help protect yourself in the event your broker goes bankrupt. Although there are no such chances of this mishap, it is also essential to be prepared for unforeseen conditions!