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. Margin Account

    A margin account is a brokerage account in which the broker lends ...
  2. Federal Call

    A federal call occurs when an investor's margin account lacks ...
  3. Five Hundred Dollar Rule

    The five hundred dollar rule is a regulation that prevents a ...
  4. Long Market Value

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

    A variable margin payment that is made by members to their respective ...
  6. Maintenance Margin

    Maintenance margin is the minimum amount of equity that must ...
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. 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.
  3. Investing

    Finding Your Margin Investment Sweet Spot

    Borrowing to increase profits isn't for the faint of heart, but margin trading can mean big returns.
  4. Trading

    How Forex Brokers Make Money

    Forex brokers set their prices based on commission, spread, or a combination of both. Traders have to be cautious in the thinly regulated forex market.
  5. Insights

    Margin Debt Hits all-time High: Time to Panic?

    Margin debt and equity prices: a case of the chicken or the egg?
RELATED FAQS
  1. What is a margin account?

    A margin account is an account offered by brokerage firms that allows investors to borrow money to buy securities. Read Answer >>
  2. What's the difference between a cash account and a margin account?

    All transactions in a cash account must be made with available cash or long positions; a margin account allows investors ... Read Answer >>
  3. What Does a Share Liquidation in My Account Mean?

    A liquidation occurs when an account's holdings are sold off by the firm where the account was held. Read Answer >>
Trading Center