What is the 'Call Money Rate'

The call money rate is the interest rate on a type of short-term loan that banks give to brokers who in turn lend the money to investors to fund margin accounts. For both brokers and investors, this type of loan does not have a set repayment schedule and must be repaid on demand. The investor who owns the margin account pays their broker the call money rate plus a service fee in return for using the margin capabilities offered by the broker.

The call money rate is also called the broker loan rate.

BREAKING DOWN 'Call Money Rate'

The call money rate is used to compute the borrowing rate an investor will pay when trading on margin in their brokerage account. Trading on margin is a risky strategy in which investors make trades with borrowed money. Trading with borrowed money increases the investor's leverage which in turn amplifies the risk level of the investment.

The advantage of margin trading is that investment gains are magnified; the disadvantage is that losses are also amplified. When investors trading on margin experience a decline in equity past a certain level relative to the amount they have borrowed, the brokerage will issue a margin call that requires them to deposit more cash in their account or to sell enough securities to make up the shortfall. This can increase losses to the investor because margin calls most likely occur when the securities in the account have significantly decreased in value. Selling securities at the time when they have lost value forces the investor to lock in losses as opposed to continuing to hold the investment and wait for a time when the value has recovered in order to sell.

RELATED TERMS
  1. Call Money

    Call money is money loaned by a bank that must be repaid on demand. ...
  2. Call Loan Rate

    The short term interest rate charged by banks on loans extended ...
  3. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  4. Long Market Value

    The long market value is the current market value of the securities ...
  5. Minimum Margin

    Minimum margin is the initial amount required to be deposited ...
  6. Initial Margin

    The percentage of the purchase price of securities (that can ...
Related Articles
  1. Trading

    Margin Trading

    Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky.
  2. Investing

    Leveraged Investment Showdown

    Margin loans, futures and ETF options can all mean better returns, but which one should you pick?
  3. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  4. Investing

    Brokerage Accounts, Explained

    Brokerages bring together customers or institutions and world financial markets. Here's everything to know about how they operate and what they do.
  5. Personal Finance

    The Best Way to Borrow

    There are many ways to secure funding. Find out the pros and cons of each way to borrow.
  6. Investing

    Uncovering Hidden Broker Fees

    Even discount brokers can hit you with some fees that seem unnecessary; here are some to watch out for.
RELATED FAQS
  1. How much can I borrow with a margin account?

    Understand the basics of margin accounts and buying on margin, including what amount investors can typically borrow for purchases ... Read Answer >>
  2. Do you have to sell your stocks when you get a margin call?

    Understand the implications of a margin call and what an investor's options are when the stock he purchased on margin falls ... Read Answer >>
  3. What is the interest rate offered on a typical margin account?

    Learn about the basics of trading on margin accounts, specifically the rate of interest that is typically charged for margin ... Read Answer >>
Hot Definitions
  1. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  4. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  5. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center