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Definition: Broker’s Call
Also known as the ‘Call loan rate’, the Broker’s call is the interest rate to which, relatively quoted are the margin loans. This rate is published daily in different periodicals such as the Wall Street Journal, Investor’s business daily etc. The broker’s call or call loan rate form the basis of pricing of margin loans. Alternatively defined, a Broker’s Call is the base rate of the broker. It is the interest rate charged by banks on loans made to brokers’ funds for client margin account financing.
Put in other words, Broker’s Call is the short term interest rate at which banks give loans to brokers/dealers, who in turn use the funds to finance clients’ margin loans. Generally margin loan rates are quoted with the base as the broker’s call rate, the broker can offer loans at a premium to the Broker’s call, to gain a profit.
As defined above, a call loan is a loan to a broker-dealer, specifically to finance margin accounts of clients. The call loan interest rate or broker’s call is calculated daily. It is named so, as the loans are payable on demand upon request by the lending institution. The call loan rate or broker’s call can vary on a daily basis in response to underlying interest rate index, funds’ demand and supply, economic situations, i.e the broker's call is a variable rate. A broker's call might also vary during the term/life of a loan, which might be a short term or a long term margin loan.
What is a margin/margin loan?
This caters to individuals who want to buy securities they cannot completely fund alone. A margin account is a kind of brokerage account. Investors here do have the option to borrow on margin from brokers for the security purchase. Here the broker lends the individual funds on a short term basis for security purchase. This margin loan is collateralized by securities in the account, and initial maintenance deposit. A margin account gives the investor the power of leverage to trade larger positions, but also has potential to magnify profits/losses.
In short, margin is buying securities on credit while collateralizing the same securities.
The broker enters into an agreement (to repay on demand) with a bank to arrange for the required funds. The interest rate of a particular margin loan is generally based on the brokers’ call and is individually determined. The loan rate is also generally based upon a benchmark like the LIBOR in addition to the brokers’ margin(ranging from 0.75 to 3.5%).
Features of using margin loans:
• Greater Purchasing Power – upon having margin trading facility, an investor can buy more stock than usual.
• Equity Collateral - The cash and stocks in the client’s account are used as collateral, although brokers insist on a specific equity percentage holding, to be eligible for margin loans.
• Variable Rate – interest rate charged by the broker can be greater or lesser than the broker’s call rate. Generally it is within a 1-2% range.
• Any broker obligation is equivalent to an obligation to a bank/lending institution and should be taken seriously. Failure to meet obligations can result in legal action against the customer.
• If the margin account value falls below a stated minimum maintenance margin, the client receives a margin call for more funds, failing which his position is liquidated.
Example of a Broker’s call:
Assume A recently bought 30000 Rs worth of stock on the open market. He wishes to buy 20000 more of stock, but cannot do so due to his financial constraints. Instead he buys the excess 20000 shares on margin from his broker, at the broker specified interest rate which is generally at a premium to the broker’s call.