Your investments are (mostly) protected in case of fraud

— -- Q: If the Securities Investor Protection Corporation (SIPC) only has $1.4 billion in assets, how much of a safety net can it really provide?

A: SIPC was created by Congress in 1970 to help protect investors from losing assets when a brokerage firm goes bankrupt or suffers another financial crisis.

Basically, it is a safeguard in case employees of the brokerage firm steal money or commit fraud that causes customers' assets to go missing. If you lose money buying a stock whose price falls, SIPC will not repay you.

Also, remember that SIPC doesn't investigate fraud; that's the job of the Securities and Exchange Commission and state regulators. SIPC just steps in and helps recover customer assets.

Here's how it works. SIPC protects customer accounts up to $500,000 in total value, including up to $100,000 in cash. So, if you have $500,000 in stocks in a brokerage account, you're completely covered even if someone at the brokerage stole all your assets. If you had $500,000 in cash, you're only covered up to $100,000.

You're right to be skeptical. According to SIPC's annual report, the company has $1.4 billion in assets, which wouldn't last long if there was a major rash of fraud at giant brokerage firms. You can read more about SIPC, here, including its annual reports.

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If there's a widespread fraud that drags down numerous brokerage firms, $1.4 billion wouldn't go far. If that's what worries you, you might consider putting your money in an account insured by the Federal Deposit Insurance Corporation (FDIC) or spread your money among different brokers. Some brokerages buy additional insurance from Lloyd's of London or other insurers.

But, you can take this worry too far. Most brokerage frauds are discovered before thieves take all the money. Regulators generally step in while there are still assets to salvage, and as an account holder, you get first dibs on those assets.

And, knock on wood, so far SIPC has been adequate. Between 1970 and December 2006, SIPC put up $505 million in the recovery efforts of $15.7 billion in assets. SIPC says 99% of investors eligible for protection have been made whole following the collapse of brokerage firms.