Table of Contents
- What Is a House Call?
- Key Takeaways
- Understanding House Calls
- Examples of Brokerage House-Call Rules
- What Is the Maintenance Margin Requirement by a Brokerage Firm?
- What Happens When an Investor Buys Assets on Margin, and the Price of the Shares Falls?
- What Is the Percentage of the First Stock That Can Be Borrowed by the Customer in a Margin Account?
- The Bottom Line
What Is a House Call?
Let me explain what a house call is in simple terms. It's a demand from your brokerage firm that you, as an account holder, deposit enough cash to cover a shortfall in your margin account. This usually happens after you've taken losses on investments you bought using borrowed money.
The call comes when your account balance drops below the maintenance margin that the brokerage requires. If you don't fix the shortfall within the time they give you, they'll liquidate your positions without any further warning until the minimum is met.
Key Takeaways
You need to understand that a house call is your brokerage's way of telling you to restore the minimum deposit to offset losses from assets bought on margin. When you buy on margin, you're borrowing from the 'house'—that's the brokerage—to boost your potential gains. But if the investment goes south, you owe them, and you have to reset your account to their specified minimum.
Understanding House Calls
A house call is essentially a type of margin call. If you're an investor buying assets with money borrowed from the brokerage—on margin—you must keep a minimum amount of cash or securities on deposit to handle any losses.
You might use margin buying to multiply your returns by purchasing more shares than you could with your own cash. You borrow from the house to do this. If the shares rise in price, you repay the loan and keep the profit. But if they fall, you owe the house, and if that's more than your reserve deposit, you have to cover the difference.
The house call triggers if the investment value drops below the required deposit amount. You can fix it by adding more cash or selling other assets in your account.
When you open a margin account, Regulation T from the Federal Reserve Board lets you borrow up to 50% of the first stock's purchase price. Brokerages can set this higher if they want.
After the purchase, FINRA requires brokerages to hold at least 25% of the securities' market value in margin accounts. Your brokerage might demand more, and that becomes their house requirement. When they issue a call, you have to meet it within the given period.
Examples of Brokerage House-Call Rules
Take Fidelity Investments as an example. Their margin maintenance requirement ranges from 30% to 100%, and you get five business days to sell eligible securities or deposit cash or securities for a house call. But they can cover it anytime, and portfolio margin accounts have different rules. After that, they start liquidating.
Charles Schwab usually sets a 30% maintenance for equities, though it varies by security, and their house calls are due immediately.
What Is the Maintenance Margin Requirement by a Brokerage Firm?
The maintenance margin is the minimum equity you must keep in your margin account after buying. Your equity can't drop below 25% of the securities' current market value. If it does, the brokerage may liquidate your securities.
What Happens When an Investor Buys Assets on Margin, and the Price of the Shares Falls?
You have to repay the borrowed amount to the brokerage. If you owe more than your reserve deposit, you must make up the difference.
What Is the Percentage of the First Stock That Can Be Borrowed by the Customer in a Margin Account?
You can borrow up to 50% of the purchase price, per Regulation T from the Federal Reserve Board.
The Bottom Line
In the end, a house call is your brokerage demanding that you deposit enough cash to cover a gap in your margin account, typically after losses on margin-bought investments. It happens when the balance falls below their maintenance margin. If you don't meet it in time, they'll liquidate your positions until it's satisfied. The legal minimum deposit can be up to 50%, but some brokerages require more.
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