Share Custody and Broker Failure
Your shares are usually not stored inside the broker's own balance sheet. This lesson explains custody, segregation and the protection schemes that exist in most regulated markets.
Why this matters for beginners
Understanding custody separates a genuine risk from an imagined one, and shows why choosing a regulated broker matters more than choosing the cheapest one.
Main explanation
Regulated brokers must keep client assets segregated from company assets, usually at a custodian. If the broker fails, those client holdings are meant to be identified and returned or transferred.
Shares are often held in nominee or street name, meaning the custodian is the registered holder while you hold the beneficial interest recorded in the broker's books.
Investor compensation schemes exist in most regulated markets and cover shortfalls up to a limit when assets cannot be returned. They cover failure of the firm, never investment losses.
Cash in an investing account is different from cash in a bank account and may be held with partner banks under separate rules. Checking how a broker holds cash is part of choosing one.
Example using a real company
A regulated broker fails. Client shares held at the custodian are transferred to another broker, while a shortfall in cash records is handled through the compensation scheme up to its limit.
- →Segregated holdings: your 30 shares stay identifiable as client property, not company property.
- →Compensation scheme: covers a shortfall from firm failure, not a share that fell 40 percent.
Common beginner mistakes
- ✕Believing compensation schemes cover investment losses.
- ✕Choosing an unregulated platform because fees look lower.
- ✕Never checking where cash and shares are actually held.
Key terms
- Custodian
- The institution that physically holds securities on your behalf.
- Segregation
- Keeping client assets separate from the firm's own assets.
- Nominee account
- Holdings registered to a custodian while you keep the beneficial interest.
Key takeaways
- 01Regulated brokers segregate client assets from their own.
- 02Compensation schemes cover firm failure, not market losses.
- 03Regulation and custody arrangements matter more than a small fee difference.
Check yourself
- 01Investor compensation schemes reimburse you when a share price falls.
- 02Regulated brokers must keep client assets segregated from their own.
- 03Nominee holding means the custodian is registered while you keep the beneficial interest.
Try the concept on a real company
Study a listed brokerage in the Analyzer. Reading how such a business earns money makes the difference between the platform and the investment much clearer.
Educational examples only. Not buy or sell recommendations.