How much money do you really lose when a margin call happens? A Wall Street big shot's 48-hour painful lesson

In March 2021, American hedge fund manager Bill Hwang suffered a catastrophic loss of $20 billion in just two days, becoming one of Wall Street’s fastest modern-day losers. The root cause of this storm was—margin liquidation.

Case of Bill Hwang: How terrible is the cost of high leverage?

Bill Hwang is a private equity fund manager whose winning strategy is simple: select promising companies and use大量 leverage to amplify returns. This strategy allowed him to grow his assets from $220 million to $20 billion in 10 years, making him a prominent figure on Wall Street.

But leverage is like a double-edged sword. When the stock market experienced massive volatility in 2021, his holdings faced severe damage. Brokers, to protect themselves, forcibly liquidated his stocks. Due to the large volume of stocks he held, the market couldn’t absorb these sell orders, causing prices to plummet and triggering chain reactions of margin liquidation. Ultimately, all his investments plummeted in value within a short period, and his $20 billion assets evaporated instantly.

This is an extreme case of how much you can lose in margin liquidation.

What is margin liquidation? Why does it cause losses?

Margin is borrowing money from a broker to buy stocks. Suppose you are bullish on Apple stock (currently $150/share), but you only have $50. The broker lends you $100, allowing you to buy one share.

Profit scenario: The stock rises to $160, you sell, pay back the broker $100 plus interest, and keep $59.5, earning a 19% profit.

But what if the stock falls? That’s the problem. If the stock drops to $78, your shares are worth only $78, but you still owe the broker $100. To ensure the borrowed money can be recovered, the broker will require you to top up the margin.

Taking Taiwan stocks as an example, margin financing usually involves investors providing 40% of the funds, with the broker covering 60%. The maintenance margin ratio is calculated as (total stock value ÷ borrowed amount). When the ratio drops below 130%, meaning the stock price falls to about $78, the broker will require the investor to add funds, known as “margin call.” If the investor does not meet the margin call within the specified period, the broker has the right to sell your stocks—this action is called “forced liquidation,” from the investor’s perspective, “margin call” or “爆倉” (blowout).

How much does the investor lose at this point? Besides the loss caused by the stock’s decline, they also have to pay interest costs.

What chain reaction does margin liquidation cause to stock prices?

Phenomenon 1: Overly oversold stocks trigger a surge of margin calls

Generally, investors hesitate to sell when stock prices fall, fearing realization of losses. But brokers are different—they only care about recovering their lent money. During forced liquidation, they prioritize executing trades over getting the best price for investors.

When a stock experiences a sharp decline leading to margin calls,大量 brokers’ sell orders can push the stock price far below its fair value, triggering more margin calls from other investors, creating a vicious cycle. The more the stock drops, the more margin calls occur, and the more the stock price drops.

Phenomenon 2: Stock holdings become chaotic

Before margin calls, stable holdings (internal teams, pension funds, insurance companies, long-term investors) control the stock. After margin calls, stocks sold off by brokers flood into retail investors’ hands. Retail investors tend to be short-sighted, buying and selling on minor fluctuations, leading to a reluctance of large funds to participate, causing stocks to enter long-term consolidation or decline.

How to use margin wisely without falling into margin call traps?

Although margin carries high risks, proper use can actually improve capital efficiency:

1. Use margin for phased positioning
If you are bullish on a company but have limited funds, you can use margin to buy part of it first. If the stock price drops, you still have cash to continue buying in stages, lowering your average cost.

2. Choose stocks with sufficient liquidity
From Bill Hwang’s lesson, it’s crucial to select stocks with large market capitalization and high trading volume when using margin. Otherwise, a big liquidation can devastate small stocks.

3. Consider the cost of margin
Margin involves paying interest, so the expected return on your investment must significantly exceed the interest cost. If a stock’s annual dividend and margin interest are roughly equal, the investment isn’t worthwhile.

4. Set profit-taking and stop-loss levels at support and resistance zones
If the stock price cannot break through resistance, holding on means paying interest without gains—consider taking profits. Similarly, if the stock breaks below support, short-term rebounds are unlikely, and it’s better to cut losses early.

Conclusion

The amount lost in margin liquidation depends on three factors: how much the stock falls, the leverage ratio used, and the timing of forced liquidation. Bill Hwang’s $20 billion loss is an extreme combination of these three factors.

Leverage is an amplifier—it can accelerate gains but also losses. Before investing, do thorough research, set clear risk tolerance levels, and avoid exposing yourself to unpredictable losses.