Call Money

You've identified a sure-fire, can't-miss, once-in-a-lifetime stock investment. The only issue is getting you hands on a enough money to make the bet worth your while. How to get some additional funds to buy the stock? It's called margin.

Investors can set up a margin account with a brokerage firm, which allows them to borrow up to 50% of a stock purchase price to make the transaction. From the account holder's point of view, this money just magically appears. But it has to come from somewhere. On the other side of the transaction, the brokerage usually gets this money from a bank...they are borrowing the money, just like you are borrowing it from them.

Known as call money, this is a very short-term loan that banks make to brokerage firms. The rates are not available to the general public, and are somewhat risky for the brokerage, as the bank could call in the loan at any time. If that happens, it would force the brokerage firm to come up with the money to pay it back, or force their client to pay it back early (which would probably not go over well).

So let's say Can't Lose Inc. wants to purchase 100,000 shares of a hot stock priced at $30 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 Play Today Pay Tomorrow does not have that kind of cash available to loan out, so they go to a bank who gives them a call money rate of 6%.

Can't Lose buys the stock on margin at $30 a share and sells it for $35 a share 20 days later. This gives them plenty of time to pay back their margin loan and pocket the $5 a share profit. Play Today is also happy because they can pay back their call money loan to the bank within the 30 days. If Can't Lose could only sell their shares at $25 a share, they would have to make up the difference to pay back the brokerage firm.