What does it mean to encounter a margin call when buying stocks on margin? See how Bill Hwang lost $20 billion in 48 hours.

In 2021, a shocking event happened on Wall Street—a hedge fund manager named Bill Hwang lost 20 billion USD in just two days. The key to this story lies in a term: liquidation. What does liquidation mean? Why did such a tragedy occur?

Starting with the case: Why did Bill Hwang get margin called

Bill Hwang is a fund manager with an aggressive investment style. His wealth-building rule is simple—pick promising companies and amplify gains with leverage. This approach allowed him to grow his assets from 220 million USD to 20 billion USD in just 10 years, making him a Wall Street legend.

But leverage is like a double-edged sword.

When the stock market experienced huge volatility in 2021, his holdings faced significant fluctuations. Due to the large number of stocks he held, brokers feared they might not recover the lent funds and decided to forcibly sell his stocks. The problem was, there weren’t enough buyers to absorb such a massive sell-off, causing stock prices to plummet, which triggered a chain reaction—other margin traders also got margin called. This not only affected poorly performing stocks but also forced liquidation of stocks that were originally stable, as brokers sold to maintain margin requirements.

What does liquidation mean? Explained in one sentence

Liquidation is margin call. When you buy stocks on margin, if the stock price drops to a certain level, the broker will require you to add more funds (a margin call). If you cannot provide the additional funds, the broker will forcibly sell your stocks—this process is called “forced liquidation,” and from an investor’s perspective, it’s “margin liquidation.”

What is margin? Why do investors use margin to buy stocks

The concept of margin is simple—just like buying a house with a mortgage—you put in a portion of the money, and the broker lends you the rest to buy stocks.

For example: Suppose Apple stock is now $150 per share, but you only have $50. The broker can lend you $100, allowing you to buy 1 share.

• Profit scenario: If the stock price rises to $160, after selling, you pay back the broker $100 plus interest, and the remaining is your profit. You earn 19%, far higher than the 6.7% increase in stock price itself.

• Loss scenario: If the stock drops to $78, the broker will require you to add margin. In Taiwan stocks, margin is usually 40% from investors and 60% from brokers, with an initial margin maintenance ratio of 167%. When the maintenance ratio drops below 130%, meaning the stock price falls to $78, the broker will demand a margin call. If you cannot provide the funds, the broker will sell your stocks directly—this is liquidation.

How does liquidation affect stock prices

Impact 1: Stock prices will keep falling, even overshoot

Generally, investors don’t sell easily when stock prices decline, but brokers are different. Brokers only want to recover their lent money, so during forced liquidation, they sell at “market price” to ensure the transaction completes, not at a higher price.

When a stock crashes and triggers margin calls, the stocks sold in forced liquidation flood the market, causing prices to overshoot downward. This then triggers a new wave of margin calls, creating a vicious cycle—stock prices keep falling.

Impact 2: Stock chips become messy, and long-term performance weakens

Stocks sold in forced liquidation usually end up in retail investors’ hands. Retail investors tend to be short-sighted, buying and selling on small price movements, which discourages large institutional capital from entering. Ultimately, the stock may need to wait for major positive news from the company to attract market funds again.

How to smartly use margin to profit

Although margin trading is risky, if used wisely, it can make capital more efficient:

• Gradual buying: If you are optimistic about a company but have limited funds, margin can help you buy in stages. When the stock rises, you profit directly; if it falls, you have additional funds to re-enter, lowering your average cost.

• Choose liquid stocks: Always select stocks with large market capitalization and high trading volume; otherwise, a big trader’s liquidation could cause severe price swings. Bill Hwang’s lesson is this.

• Calculate margin costs vs. expected returns: Borrowing on margin incurs interest. Choosing the right investment period and target is crucial. If the dividend yield over a year is similar to the margin interest, the investment loses its meaning.

• Set stop-loss and take-profit at resistance and support levels: When a stock cannot break through resistance and starts consolidating, consider taking profits; if it breaks support, it’s unlikely to rebound quickly, so set a stop-loss. Disciplined operation is key to long-term success.

Conclusion

Leverage can indeed amplify gains, but it also accelerates losses. Buying stocks on margin is a high-risk strategy, with the risks of liquidation and margin calls always present. Before investing, understand your risk tolerance, do thorough research, and avoid exposing your assets to unknown risks.