What Is a House Call?
A house call is a demand from a brokerage for an investor to restore the minimum required deposit to offset losses in the value of assets bought on margin. Buyers on margin borrow from the brokerage to amplify their gains. If the investment fails, the buyer owes the brokerage.
Basics
When using brokerage services, you may be asked to add funds to your margin account to cover a deficit. This situation commonly arises after losses incurred from investments acquired through margin trading.
The activation of this provision transpires when the account balance descends beneath the maintenance margin level stipulated by the brokerage firm. Should the account holder neglect to rectify this insufficiency within the allocated timeframe, the brokerage firm reserves the prerogative to liquidate the account holder's positions without prior intimation. This process persists until the minimum mandatory threshold is reinstated.
House Calls Explained
The house call, a variant of the margin call concept, surfaces as an integral component of investment leveraging. Engaging in asset acquisition through borrowed capital, or "on margin," obligates investors to uphold a predefined threshold of cash or securities within their deposited holdings to counterbalance prospective losses.
Investors resort to margin-based purchases to amplify potential gains by increasing the volume of shares procured. This is accomplished through borrowing from the brokerage entity. A triumphant outcome involves share prices ascending, allowing the investors to settle their debt while reaping surplus profits. Conversely, a downturn translates to indebtedness. If this indebtedness surpasses the reserved funds, an adjustment becomes imperative.
The initiation of a house call transpires when the investment's value descends beneath the obligatory deposit value. To remedy this situation, the investor can inject additional capital or liquidate alternate assets within the account.
Upon establishing a margin account, Regulation T of the Federal Reserve Board permits clients to borrow up to half of the initial stock's purchase price. However, brokerage establishments wield the authority to augment this percentage as deemed appropriate.
Once a margin-based stock purchase occurs, further stipulations from the Financial Industry Regulatory Authority (FINRA) are enacted. One such decree mandates brokerages to reserve a minimum of 25% of the securities market value procured through leveraging. This reserved proportion essentially becomes the stipulated deposit criterion. Upon issuing a house call, the account holder must adhere to the margin maintenance requisite within a predefined span.
Illustratively, Fidelity Investments prescribes a variable margin maintenance criterion ranging from 30% to 100%. In the event of a house call, account holders are granted a window of five business days to either vend margin-eligible securities or infuse cash or equivalent securities. However, Fidelity retains the prerogative to fulfill the call at any juncture. For portfolio margin accounts, distinct prerequisites are applicable. Following this interval, the brokerage commences securities liquidation. Charles Schwab, on the other hand, typically imposes a 30% maintenance requirement, although this may fluctuate in correspondence with the security in question. For Charles Schwab, house calls necessitate immediate compliance.
Conclusion
A house call is a brokerage demand for investors to restore minimum deposits and offset losses in margin-traded assets. Trading on margin involves borrowing to amplify gains, but downturns can lead to owing the brokerage. When an account balance falls below set levels, the brokerage issues a house call. Investors can inject funds or sell assets to cover the deficit. This practice is integral to leveraging investments, where borrowers must maintain a balance to counter losses. Regulation T permits borrowing up to half a stock's price, while FINRA requires reserving 25% of leveraged securities' value. Notably, Fidelity's margin maintenance varies from 30% to 100%, with a 5-day window for action, whereas Charles Schwab enforces a 30% requirement and immediate house call compliance.