The Meaning of "Cash Call"
A "cash call" usually applies to securities and brokerage accounts. It is a notice to satisfy a debit balance in an account requiring a deposit of cash within a set amount of time. Cash calls are known by other names, including "margin call," "house call," and "Reg T call." In British financial terms, a "cash call" denotes a company asking existing shareholders or new underwriters for additional investment money. "Cash Call" is also the name of a California consumer loan company.
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Significance
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Receiving a cash call is significant because it means there is a negative balance in an account. A negative balance does not mean there is no equity in the account. It usually means an account balance has fallen below requirements for margin trading. According to a definition of terms from ETrade, negative balances need to be paid immediately. While there is usually some grace period provided to meet a cash call, ETrade notes the margin department of a brokerage firm can sell securities in the account at any time to meet the call.
Types
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Cash calls can be triggered by a variety of circumstances. A margin call can occur due to a drop in stock prices, withdrawal of funds, or other reasons. A federal margin call, also known as a Reg T call, occurs when account equity falls below the Federal Reserve Board's margin requirement when making an initial purchase. A house call involves a brokerage firm's internal minimum account requirements, usually caused by market price fluctuations in the securities held in an account.
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Effects
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Regardless of what a cash call is named, the results are the same. The account holder has to deposit additional funds, liquidate securities, or close short positions to bring the account back to minimum requirements. In certain instances, the only way a call can be met is by adding funds to the account. The brokerage firm can also sell securities at the firm's discretion. In a volatile market, additional cash calls can be made after the first call, continuing until the account meets federal and firm guidelines.
Time Frame
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When a cash call is made, there is very limited time to meet the call. Sometimes, the brokerage firm takes action without notice. Generally acceptable ways to meet cash calls is to wire funds or send by overnight courier. When sending overnight, one large trading firm recommends calling the company and providing tracking information for the funds so the firm can note this information on the account. For pattern day traders, there are specialty cash calls that can be met within a two to five business days.
Effects
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Failure to meet a cash call can result in a brokerage firm selling enough securities to meet the cash requirements up to and including liquidating the account. For pattern day traders, additional cash call restrictions apply. When day trading, keeping enough equity in an account to meet normal margin requirements is not sufficient to avoid possible cash calls. Exceeding day trading purchasing power, holding positions overnight, or dropping below a $25,000 account minimum can trigger lowering account purchasing power levels down to restricting accounts to a cash-only transaction basis, effectively eliminating any margin or leverage for a day trader.
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