What Is a House Call?
A house call is a demand by a brokerage firm that an account holder deposit enough cash to cover a shortfall in the amount of money deposited in a margin account. This typically follows losses in the investments bought on margin.
The call is made when the account balance has fallen below the maintenance margin required by the brokerage firm. If the client fails to make up the shortfall in the time specified by the house, the account holder's positions will be liquidated without further notice until the minimum requirement is satisfied.
- A house call is a brokerage house demand that an investor restore the minimum required deposit in order to offset losses in the value of assets bought on margin.
- Buyers on margin borrow from "the house," or the brokerage, to multiply their gains.
- If the investment tanks, the buyer owes the house.
Understanding House Calls
The house call is a type of margin call. Investors who buy assets using money borrowed from the brokerage firm, or "on margin," are required by the brokerage to retain a minimum amount of cash or securities on deposit to offset losses.
Buying on margin is used by investors who hope to multiply their returns by multiplying the number of shares they buy. They borrow money from the house in order to achieve that goal. If they succeed, and the price of the shares increases, they repay the loan and pocket the rest as profit. If they fail and the price of the shares falls, they owe the house. If they owe more than they have deposited in reserve, they must make up the difference.
A house call goes out if the investment falls in value below the amount of the required deposit. The investor can cover the shortfall by depositing more cash or selling other assets in the account.
When a customer opens a margin account, up to 50% of the purchase price of the first stock in the account can be borrowed by the customer in accordance with Regulation T of the Federal Reserve Board. Individual brokerage firms have the discretion to increase this percentage.
After a stock is purchased on margin, the Financial Industry Regulatory Authority (FINRA) imposes further requirements on margin accounts. One requires that a brokerage hold at least 25% of the market value of the securities purchased on margin. The brokerage firm may set a higher minimum.
The minimum deposit may be up to 50%, but some brokerages set a higher amount.
That number effectively becomes the house requirement for a deposit. When a house call is issued, the account holder must meet the margin maintenance requirement within a stated period.
Fidelity Investments, for example, has a margin maintenance requirement that ranges from 30% to 100%, and its house call allows an account holder five business days to sell margin-eligible securities or deposit cash or margin-eligible securities, but Fidelity may cover the call at any time (portfolio margin accounts follow a different set of requirements). After that, the firm will start liquidating securities. Charles Schwab has a maintenance requirement that is usually 30%, so it can vary with the security, but house calls are due "immediately" by the firm.
What Is the Maintenance Margin Requirement by a Brokerage Firm?
The maintenance margin is the minimum equity an investor must hold in the margin account after the purchase has been made. The customer's equity in the account must not fall below 25% of the current market value of the securities in the account. If this requirement is not met, the brokerage firm may liquidate the securities in the customer's account.
What Happens When an Investor Buys Assets on Margin, and the Price of the Shares Falls?
The investor needs to repay the borrowed amount to the brokerage firm. If they owe more than they have deposited in reserve, they must make up the difference.
What Is the Percentage of the First Stock That Can Be Borrowed by the Customer in a Margin Account?
Up to 50% of the purchase price, according to Regulation T of the Federal Reserve Board.