What is call money?
Call money is a short-term financial loan that has to be repaid immediately when the lender demands it. The borrower has to repay the full amount of the loan as soon as the lender asks for it. This differs from a term loan with a fixed maturity date and payment terms.
Understanding Call Money
Banks and brokerage firms generally use call money to meet their liquidity needs. The interest rate on call money is called the call loan rate.
Brokerage firms borrow call money from banks to finance margin accounts for their clients who want to buy securities on credit. The call money can be transferred quickly between lenders and borrowers. It is one of the most liquid assets on a balance sheet after cash.
If the bank asks for the repayment of the call money, the brokerage firm can issue a margin call to its clients, which means they have to sell some of their securities or deposit more cash to cover the loan. The margin rate, or the interest rate on credit used to buy securities, depends on the call loan rate set by banks. Borrowing on margin can increase the risk for investors if the value of their securities falls