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 the benchmark interest rate that banks charge brokers who are borrowing the money to fund margin loans.
- The call money rate, also known as the broker loan rate, typically isn’t available to individuals, instead, investors pay the call money rate plus a service fee on a margin account.
- Margin trading allows gains to be magnified via leverage, but it also magnifies losses.
- Margin calls happen when the securities in the account have significantly decreased in value.
How the Call Money Rate Works
The call money rate, also called the broker loan 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.
Example of the Call Money Rate
The current call money rate is 2% as of April 2020. In April 2019 the call money rate was 4.25%. Broker ABC is looking to purchase 1,000 shares of Apple Inc. for a large client that’s looking to buy the shares on margin. The client will pay the broker in full within 30 days.
The broker will then borrow the needed money from a bank so that the client can buy shares now. The bank can call the loan at any time and charges a call money rate of the London InterBank Offered Rate (LIBOR) plus 0.1%. If the broker chooses to collect the money before the 30 days is up they’ll do a margin call. Or if the value of the securities fall below the maintenance margin requirement they’ll call the loan.