Loss of 20 billion USD in just 2 days! The Bill Hwang liquidation incident reveals the meaning of stock short selling

In March 2021, Wall Street witnessed a shocking wealth collapse—private equity fund manager Bill Hwang lost over $20 billion in just 48 hours, becoming one of the fastest losers in modern history. The culprit behind this storm was not a market crash, but a risk that every financial practitioner should know: margin liquidation.

What exactly does a stock liquidation mean?

Simply put, liquidation is forced liquidation—you invest with borrowed money, but due to a price decline, your position is forcibly closed.

Imagine this: you are bullish on Apple stock, currently trading at $150 per share, but you only have $50, so you borrow $100 from your broker to buy one share. If the stock rises to $160, you sell for a 19% profit, but if it drops to $78, the broker can’t sit still.

Why? Because the broker needs to ensure it can recover the borrowed money. When the stock price falls to a certain level, the broker will require you to top up your margin. For example, in Taiwan stocks, financing usually involves investors putting up 40%, and brokers covering 60%. When the initial stock price is 100 NT dollars, the maintenance margin rate is 167%, but when the maintenance margin drops below 130% (stock price falls to 78 NT dollars), the broker will send a margin call notice.

If you don’t have the funds to top up, the broker will directly sell your stocks—this is called forced liquidation. From an investor’s perspective, this is liquidation or margin call.

Why does liquidation trigger chain reactions in stock prices?

The most terrifying part of liquidation isn’t just the forced sale itself, but the chain reaction it can cause.

Generally, investors seeing a stock price decline might hesitate to sell. But brokers are different—they want to recover their funds quickly, so they sell at market price without regard for the stock’s value. Massive sell-offs flood the market, pushing the stock price far below its actual value, which in turn triggers liquidation risks for other margin investors.

Thus, one person’s liquidation can turn into a slaughterhouse for the entire stock.

How did Bill Hwang lose $20 billion in 2 days?

Bill Hwang is a perfect example. Over ten years, he leveraged his assets from $220 million to $20 billion. His strategy was simple: pick good companies and then heavily leverage to buy.

In 2021, market volatility increased sharply, causing his holdings to fluctuate wildly. Brokers began forcing liquidation of his stocks, but the key was—his position size was enormous. Ordinary retail investors’ liquidations are just at market price, but Hwang’s massive sell volume meant the market couldn’t absorb the sell orders, causing the stock to plummet.

Worse, to maintain sufficient margin, even his otherwise healthy holdings were forcibly liquidated. The chain reaction triggered, and all his stocks plunged in value within a short period.

Long-term damage of liquidation on stock chips

After liquidation, the stock’s ownership structure becomes extremely chaotic. Stable holders (retirement funds, insurance companies, management teams) sell their shares to retail investors. Retail investors tend to panic and sell at the slightest fluctuation, causing large capital to lose interest in the stock.

As a result: after liquidation, the stock often drifts downward for a long time until clear positive news can attract new capital.

How to use margin correctly?

Since margin trading is so risky, should you just avoid it? Not necessarily. If used properly, margin can greatly improve capital efficiency.

Gradual adding: If you believe in a company but have limited funds, margin allows you to hold multiple positions simultaneously. When the stock rises, you profit directly; when it falls, you still have funds to gradually lower your average cost.

Stock selection is crucial: The most important lesson from Hwang’s story—margin should only be used for stocks with large market cap and high liquidity. Small stocks, once heavily liquidated by big players, can be smashed beyond recognition.

Cost awareness: Margin involves interest payments. If a stock’s annual dividend and margin interest are roughly equal, it’s a losing investment. Choosing the right timing and target is key.

Technical discipline: If a stock cannot break through resistance levels, holding it with margin long-term will eat up profits through interest. It’s wise to take profits when facing resistance. Conversely, if a stock breaks support levels, it’s unlikely to rebound in the short term, and stopping loss is the prudent choice.

Conclusion

Leverage is a double-edged sword—used correctly, it accelerates wealth accumulation; used improperly, it can destroy everything in an instant. Behind high returns from margin buying are hidden risks of liquidation and margin calls.

Doing thorough research, setting stop-loss and take-profit points, and choosing sufficiently liquid assets are the iron rules for long-term success. Don’t let margin trading turn into your nightmare.