What is Margin House Call?
In simple terms, Margin House Call is a notification issued by a brokerage firm to inform an investor that their margin account has fallen below the required minimum level. In other words, it is a warning that the investor needs to deposit more funds to cover the losses or risk having their positions liquidated.
Why do Investors use Margin Accounts?
Investors use margin accounts to increase their purchasing power and potentially earn higher returns. Margin accounts allow investors to borrow money from the brokerage firm to buy securities. However, this also means that the investor is exposed to greater risk as losses can be magnified.
What Triggers a Margin House Call?
A Margin House Call is triggered when the investor’s margin account falls below the required minimum level, also known as the maintenance margin. This can happen when the value of the securities in the margin account declines, or when the investor borrows too much money and the losses exceed the available funds.
What Happens if an Investor Ignores a Margin House Call?
If an investor ignores a Margin House Call, the brokerage firm may liquidate their positions to cover the losses. This can result in significant losses for the investor and may also affect their credit score.
How to Avoid a Margin House Call?
1. Understand Your Margin Account
It is important to understand the terms and conditions of your margin account, including the maintenance margin, interest rates, and fees. This will help you make informed investment decisions and avoid unnecessary risks.
2. Monitor Your Positions
Regularly monitor your positions and the market conditions to ensure that your investments are performing as expected. If you notice any significant losses or changes in the market, take action to protect your portfolio.
3. Set Stop-Loss Orders
Setting stop-loss orders can help limit your losses and protect your portfolio. This will automatically sell your securities if they fall below a certain price, reducing the risk of further losses.
4. Maintain Sufficient Funds
To avoid a Margin House Call, ensure that you have sufficient funds in your margin account to cover any potential losses. This will also help you take advantage of buying opportunities when the market is down.
Conclusion
Margin House Call is a warning that investors need to take seriously. Understanding your margin account, monitoring your positions, setting stop-loss orders, and maintaining sufficient funds can help you avoid a Margin House Call and protect your portfolio. As with any investment, it is important to do your research and seek professional advice before making any decisions.
