Introduction
The call money rate is the interest rate levied on brokers borrowing money from banks in order to lend to investors to run margin accounts. Typically, there is no repayment deadline before which the borrower has to settle their dues. However, the borrowers (investors) must clear their dues on demand by the brokers. The investors making use of margin accounts will pay their respective brokers a service fee in addition to the call money rate.
Understanding Call Money Rate
The call money rate is used in computing the borrowing rate which an investor has to pay for trading on margin. Trading with margin money enhances the leverage of investors and thereby increase the risk involved in the investment.
Here are a few things you must know to understand call money rate: 1. This is the interest rate imposed on brokers borrowing from banks to lend to their customers 2. The investors borrowing from brokers pay the call money rate and services charge on returning the borrowed money 3. Trading with borrowed money can amplify both losses and gains
Factors to Consider
The main benefit of margin trading is that your gains on the investment can be enhanced. Also, if things go against you, you will end up magnifying losses. If the traders trading on margin see a reduction in equity beyond some point against the money they have availed in the loan, the broker notifies margin call which requires the investors to deposit more money in their respective accounts, or it will result in selling enough assets to cover the difference.
This will magnify losses of the investor as margin calls generally happen when the assets in an account have witnessed a steep fall in their value. Selling assets at a point when the value has been lost will force the investors to cut losses as compared to holding them further in order to wait until the value rises.
