Call Money Rate: What It Is, How It Works, Examples

What Is the Call Money Rate?

The term call money rate refers to the interest rate a brokerage pays to a bank when it finances a margin loan. Margin loans are short-term loans used by investors to buy and sell securities out of a margin account. Brokers pass on the call money rate to their investor clients. Once paid, the broker pays it to the financing bank. Investors are also responsible for paying an additional service fee to the broker for using the margin capabilities.

Understanding the Call Money Rate

When a trader uses a margin account, they borrow money from their broker-dealer to execute their trades. Securities held in the account are counted as collateral for the loan. Like other loans, the investor is charged interest. This is called the call money rate.

Investors pay the call money rate to the broker, who then pays it back to the bank that finances the loan. Investors also pay their broker an additional service charge for the loan. This additional fee is usually a percentage of the loan amount.

The call money rate, which is also called the broker loan rate or the broker's call, is used to compute the borrowing rate an investor will pay when trading on margin in their brokerage account. Margin trading can be a risky strategy because investors make trades with borrowed money. But, it does increase the investor's leverage, which in turn amplifies the risk level of the investment.

The call money rate changes over time. It is determined by several factors, including supply and demand and interest rates. The state of the economy also plays a key role in how this rate is set. The call rate is published and updated regularly by The Wall Street Journal.

Special Considerations 

The advantage of margin trading is that investment gains are magnified. But, 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 significantly decrease in value, so selling securities when they lose value forces the investor to lock in losses as opposed to continuing to hold the investment and wait for a time when the value recovers to sell.

Example of the Call Money Rate

Here's a hypothetical example to show how call money works. Let's assume that Broker ABC wants to purchase 1,000 shares of Apple (AAPL) for a large client who is looking to buy the shares on margin. The client will pay the broker in full within 30 days. 

The broker then borrows the needed money from a bank so the client can buy the shares. The bank can call the loan at any time and charges a call money rate plus 0.1%. If the broker chooses to collect the money before the 30 days is up, they’ll do a margin call. If the value of the securities falls below the maintenance margin requirement, the broker can call the loan. 

The Bottom Line

Banks charge interest for the money they lend to borrowers. This includes short-term loans made to broker-dealers who lend capital to investors for their margin accounts. Known as the call money rate, it is passed on from the bank to the broker, who then passes it on to the investor. If you're an investor who trades on margin, remember the risks can be as great as the rewards. So make sure you do your research and due diligence before using borrowed capital to buy and sell securities so you don't experience major losses.