Definition
A house call is a term used in finance, primarily in brokerage accounts, to refer to a margin call. It’s a demand by a broker for a client to deposit additional money or securities to meet the minimum required maintenance margin due to an unfavorable price movement. Failing to meet a house call can lead to brokers selling securities from the client’s account without notification.
Phonetic
The phonetic transcription of the key word: “House Call” is /ˈhaʊs kɔːl/.
Key Takeaways
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Importance
The term ‘House Call’ is a significant concept in the business/finance world because it refers to a margin call by the brokerage firm. This occurs when the value of a margin account falls below the set maintenance margin, which jeopardizes the brokerage’s money lent to the investor for buying securities. The investor either has to deposit more cash into the account or sell some of the assets held in the account to meet the house call. This concept is important as it protects brokerages from significant losses that could occur when an investor’s equity in a margin account depreciates beyond acceptable levels, thereby ensuring healthy financial operations.
Explanation
The purpose of a House Call in finance or business refers to the warning or signal issued to investors by brokerage firms when they have failed to maintain the minimum required equity-to-margin ratio in their investment accounts. Essentially, it is used as a protective measure to ensure the proper management of risks associated with market volatility and leverage. When a house call is made, the investor is required to restore the balance in their margin account, which ensures that their investments stay within the allowable ratio of debt to equity and minimizes potential losses for the brokerage firm.The house call serves a critical function in balancing the systemic risks associated with margin trading. Margin trading involves the use of borrowed funds from the broker to purchase securities, which can magnify both gains and losses. As the markets fluctuate, so too does the value of the investor’s account. If the account’s value depreciates significantly, it can trigger a house call, requiring immediate repayment of a portion or all of the margin loan. This acts as a safeguard against escalating losses and potential default on the margin loan, protecting both the investor and the broker from further financial damage.
Examples
1. Brokerage Account: A brokerage account holder may experience a house call if the value of the investments drop significantly. For instance, an investor had $50,000 in a margin account and made an investment into a stock for $20,000, using $10,000 of their own cash and $10,000 of credit from the brokerage. If the value of that stock drops to $15,000, the investment would now only cover the brokerage’s loaned amount entirely and the investor will receive a house call to deposit additional money to bring the net equity back up to the required level.2. Real Estate Investment: A house call can occur in real estate investment if the market value of property drops drastically. For instance, a real estate investor uses borrowed money to purchase several properties. Due to a market crash, the properties’ market value drop significantly. As a result, the lender issues a house call, requiring the investor to repay part of the loans earlier than planned or to add additional properties as collateral.3. Futures Trading: In futures trading, a trader might receive a house call if their margin account value drops below the maintenance margin – the minimum amount that should be maintained in an account to support all open trades. For example, a futures trader is trading on margin and the market moves dramatically against their position. As losses accumulate, their broker makes a house call, requiring that they deposit additional funds into their account to cover the losses and meet the minimum maintenance margin.
Frequently Asked Questions(FAQ)
What is a House Call in financial and business terms?
A House Call refers to a broker’s demand for an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin.
What triggers a House Call?
When the value of the investor’s margin account falls below the broker’s required amount, a house call is triggered. This often happens when the underlying equities in your portfolio have decreased in total value.
How can one meet a House Call?
To meet a House Call, an investor can either deposit more cash into their account, add more securities, or sell some of their current positions to raise the necessary funds.
What happens if an investor is unable to meet a House Call?
If an investor is unable to meet a House Call, the broker has the right to sell the investor’s securities without any notification to cover the margin call.
What is the difference between a House Call and a Maintenance Margin Call?
A House Call and a Maintenance Margin call are the same. Both refer to the demand by a broker for an investor to increase the equity in their margin account to meet the minimum requirements.
Can I avoid House Calls?
Yes, to avoid House Calls, keep ample cash in your account, keep a close eye on your investments, and strategically invest in low-volatile stocks. It’s also essential to understand the terms of your margin agreement.
What does a House Call mean for the investor?
A House Call effectively conveys that the current market conditions are endangering the broker’s investment in the investor’s margin account, and either additional money or stock must be input to ensure the risk levels are reduced back within acceptable parameters.
Related Finance Terms
- Margin Call: This is a requirement by a broker to deposit more cash or securities into a margin account when the value falls below a certain level.
- Equity: The value of an asset after all liabilities or debts have been paid. In terms of investing, it refers to shareholders’ equity or the value of a property after mortgages or other charges have been paid.
- Collateral: Assets that are offered to secure a loan or other credit. In the context of a house call, it could refer to additional securities or cash that need to be added to a margin account.
- Leverage: The use of borrowed funds to increase an investment’s potential return. A house call might occur if an investor has used too much leverage, causing their equity to fall below the required level.
- Margin Account: An investment account that allows customers to borrow money to buy securities. A house call is an event that can occur within this type of account.
