Call Loan Rate

Wouldn't it be great if you saw a great deal on a stock that was selling low, you could borrow the money, buy the stock and then quickly sell it at a profit to pay back the loan? After all, it does take money to make money. Investors do this all the time by setting up a margin account at a brokerage firm. They can borrow money to buy up to 50% of the value of a stock and pay it back (usually within 30 days).

But where does the brokerage firm get the money to loan out? From a bank of course, with a special call loan rate.

Let's say Johnny Hotshot wants to purchase 5,000 shares of a stock that has hit what he thinks is a temporary low price of $15 per share on his margin account. He promises to pay the money back within 30 days after he has bought and sold the stock, preferably at a profit. The brokerage firm Get Rich Quick does not have that much cash available, so they go hat in hand to a bank who loans them the money at a call loan rate of 4%.

This sounds like a great deal except the call loan rate is recalculated every day and also compounds daily until the loan is repaid or is called in by the bank. Calling in means the bank decided they want their money pronto, so if they do, Get Rich Quick has to pay back the loan immediately. If they do not have the funds, they will need to force Johnny Hotshot to use the cash in his margin account or sell his securities in order to raise enough money to repay the call loan.