What it means
A margin account lets investors borrow from their broker to buy securities, with the securities held as collateral (assets pledged to back a loan). The investor's equity is the market value of the securities minus the amount borrowed.
As prices fall, equity shrinks, and the broker must make sure the loan stays safe. Regulators set a minimum equity level for margin accounts, commonly 25% of the market value for most long positions in the United States.
Brokers are free to set higher levels, called house requirements, to protect themselves. A house call is triggered when equity falls below the broker's higher level, even though it may still be above the regulatory minimum.
The notice usually states how much must be deposited and by when, which is often within a few days but can be shorter in volatile markets. The customer can deposit cash, add securities or sell some holdings to reduce the loan.
Brokers can also raise house requirements for risky stocks or concentrated positions without prior warning. Failing to meet a house call has consequences.
The broker may sell securities without asking, may choose which ones to sell, and may do so at poor prices during a fall. Losses from the forced sale belong to the customer, who may still owe money if the sale does not cover the loan.
There are three ways to meet a call, and each has a different cost. Depositing cash keeps the investment intact but uses up liquidity, adding securities raises the collateral without a sale, and selling holdings locks in the loss but reduces the loan.
Many advisers prefer to cut the position early so that a call never happens. Business readers may meet this term when an executive uses margin to buy company shares or a treasury invests surplus cash with leverage.
The sensible rule is to keep a buffer of equity well above the requirement, because markets can move faster than notices.
In practice
Real-world examples.
Example
A retail investor has bought technology shares partly on margin. When the shares drop 10% in a week, her broker sends a notice asking for $5,000 within three days, because her equity has dipped under the broker's 35% requirement.
Example
A company executive borrows against a concentrated holding of his employer's shares. When the share price falls sharply, his broker issues a house call that he meets by transferring $20,000 from savings.
Example
A trader holding volatile small-company shares is told that the broker has raised its house requirement for those stocks from 35% to 50%. The change triggers an immediate call, and she sells half the position to reduce the loan. She would rather choose what to sell than let the broker decide for her.
Formula
Calculation
Equity = Market value of securities - Loan balance
Equity percentage = Equity / Market value x 100
House call amount = House requirement x Market value - Equity
Suppose an investor holds securities worth $65,000 with a $26,000 margin loan, so equity is $39,000, or 60%. The broker's house requirement is 35%. If the securities fall to $36,000, equity becomes $36,000 - $26,000 = $10,000, which is $10,000 / $36,000 = 27.8% of market value. The required equity is 0.35 x $36,000 = $12,600, so the house call is $12,600 - $10,000 = $2,600.Case study
Seen in the real world.
Greenfield Wealth Partners is an illustrative, fictional brokerage whose client Marcus held $200,000 of technology shares with a $90,000 margin loan. His equity was $110,000, or 55%, and he felt comfortable because the broker's house requirement was 35%.
When the sector dropped 25% over two weeks, the portfolio fell to $150,000. Equity was then $150,000 - $90,000 = $60,000, or 40%, still above the requirement. A further fall to $130,000 left equity at $40,000, or 30.8%, and the broker issued a house call for $5,500, which is 0.35 x $130,000 = $45,500 required minus $40,000.
In this illustrative story Marcus had not read the account agreement and was surprised by the call and its short deadline. He deposited the cash, then cut the loan so that his equity stayed above 50%. The lesson is to know the broker's rules and keep a buffer.
Watch out
Common mistakes.
- Assuming the regulator's minimum is the only limit that matters, when brokers can set higher house requirements.
- Waiting for the broker to choose a timetable, when the broker may sell holdings immediately without notice.
- Using the full borrowing limit, leaving no buffer for a market fall.
Questions
People also ask.
Is a house call the same as a margin call?
A house call is a type of margin call triggered by the broker's own stricter rule rather than the regulator's baseline.
Can a broker change house requirements?
Yes, brokers can raise them at any time, particularly for volatile or concentrated holdings.
What happens if I ignore it?
The broker can sell your securities to restore the required equity, and you remain responsible for any shortfall.
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