Call Money Rate

Fancy Wall Street types who take helicopters to work and eat caviar smoothies for breakfast have plenty of dough to dabble in the stock market. Meanwhile, there are many investors out there who don't have large sums of cash, but still want to mess around in the market. They can't play the market with their own money, so they purchase shares on margin. This means they take out a loan from a brokerage firm and hope to pay it back when they make that great profit when the stock they bought skyrockets in price.

But where does the brokerage firm get the money to loan out? Answer: from a bank...see, brokerages aren't that different than people. But unlike normal humans, the call money rate a brokerage firm gets for clients' margin accounts is not available to the general public.

So, let's say Too Big to Fail Inc. wants to purchase 50,000 shares of a hot stock priced at $20 per share on their margin account. They promise to pay the money back within 30 days after they have bought and sold the stock. The brokerage firm Margin Me Today does not have that kind of cash available, so they go to a bank, who loans them the money at a call money rate of 5%.

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 called in by the bank. No deadline is set for repayment, but the bank reserves the right to call in the loan at any time, which could force Too Big to Fail to pay back their margin loan immediately as well. (Gulp!)