What happens when a margin call occurs? A $20 billion blood and tears lesson

Losing 20 billion in 2 days—An extreme case of margin calls

In March 2021, Wall Street was shaken by a news story. Private equity fund manager Bill Hwang lost 20 billion USD in just 48 hours, becoming the fastest person in modern financial history to lose money. This was not a natural loss caused by market fluctuations, but a chain reaction triggered by margin calls.

Hwang’s investment strategy was simple: choose promising companies and use大量 leverage to amplify returns. This approach had allowed his assets to soar from 220 million USD to 20 billion USD over 10 years. But when a black swan appeared, leverage was no longer an amplifier but a catalyst.

What is a margin call? What essentially happened

Margin is a common tool in the stock market. You only need to put up 40% of the capital, and the broker will lend you 60%, allowing you to buy stocks with 100% of your funds. It sounds cost-effective, but only if the stock price rises.

For example: Apple stock at 150 USD per share, you have only 50 USD, and the broker lends you 100 USD. When the stock rises to 160 USD, you sell for a 19% profit, far exceeding the actual 6.7% increase. But what if the stock drops to 78 USD?

At this point, the broker starts worrying about not getting back the 100 USD loan, so they will require you to top up the margin. In the Taiwan stock market, a “margin maintenance rate” threshold is usually set. When the initial stock price is 100 NT dollars, the maintenance rate is 167% (100 ÷ 60). When the maintenance rate drops below 130%, meaning the stock price falls to 78 NT dollars, the broker will issue a margin call.

If you do not top up the margin within the specified time, the broker will not wait for you; they will directly sell your stocks—this is called forced liquidation, also known as margin call or 爆倉.

What happens during a margin call? The terrifying chain reaction

A single investor’s margin call may seem insignificant, but when large-scale margin calls happen simultaneously in the market, problems arise.

First impact: stock prices spiral into a death spiral

When investors see stocks falling, they hesitate, reconsidering whether to cut losses. But brokers won’t hesitate. They want to recover their lent money quickly, so they usually sell at market price directly, not trying to sell at a high price.

When margin call sell orders flood in, stock prices drop rapidly. Even more frightening, this triggers chain margin calls—other investors with margin positions see the stock price decline, their maintenance rates also fall below 130%, leading to a new round of forced liquidation. The more stocks fall, the more margin calls occur; the more margin calls, the further the stock price drops. This is what’s called a “margin call tide.”

In Bill Hwang’s case, he held a huge amount of stocks. When his holdings faced forced liquidation, the sell volume far exceeded market capacity, not only causing his own stocks to plummet but also forcing other margin investors to be margin called, creating wave after wave of decline. Even some high-quality stocks that originally had no volatility were forced to be liquidated by brokers to maintain margin ratios, further worsening the situation.

Second impact: stock chips become dispersed, market outlook uncertain

After margin calls, stocks flow into many retail investors’ hands. These retail investors are usually short-term speculators, buying and selling with every fluctuation. This characteristic makes large funds reluctant to enter, as they know the market lacks stability.

Originally, stocks were composed of “stable chips” like company management teams, pension funds, insurance companies, etc. These are suddenly dispersed. Recovery takes time, often waiting for the company to release major positive news to attract large capital again.

How to use margin correctly without becoming a victim of margin calls

Leverage itself is not evil; the key is how to use it.

1. Choose stocks with sufficient liquidity

Bill Hwang’s lesson tells us that when using margin to buy stocks, always select stocks with large market capitalization and ample liquidity. If your holdings are so large that they can shake the stock price, avoid them. This way, your forced liquidation won’t backfire and crash the stock.

2. Consider the balance between cost and return

Margin requires paying interest. If you choose a stock that pays dividends roughly equal to your margin interest costs annually, it’s pointless. Make sure your expected returns significantly exceed the cost of leverage.

3. Set profit-taking and stop-loss points at resistance and support zones

Stock prices often consolidate within “resistance zones” and “support zones.” If your margin-buy stock hits a resistance zone but cannot break through, it may enter a long-term consolidation. During this period, you pay interest daily but see no profit. The smartest move is to take profits when the stock cannot break resistance.

Conversely, if the stock breaks below support, it’s unlikely to rebound quickly. You should cut losses immediately rather than hope for a rebound.

4. Use staggered entries instead of all-in

The correct use of margin is to buy in stages. If you are optimistic about a stock but have limited funds, you can use margin to help build your position faster in stages. If the stock then declines, you still have funds to buy more at lower prices, reducing your average cost. This is the proper application of margin.

Conclusion

Leverage is a double-edged sword. When used well, it can accelerate wealth accumulation; when misused, it can accelerate losses and wipe you out overnight. Margin calls are not only personal losses but can trigger market chain reactions, harming innocent investors.

Always thoroughly assess risks before investing, and execute your plan with discipline to survive and profit in the long run.