From $20 billion to nothing: Uncovering the truth and risks of liquidation and forced liquidation

In March 2021, Wall Street staged a financial thriller. Hedge fund manager Bill Hwang lost $20 billion in just 48 hours, becoming one of the fastest modern-day wealth destructions. His story is not only a personal tragedy but also a profound lesson about margin calls and financing risks.

Financing and Margin Calls: The Mechanisms You Must Know

What is financing? Why does it lead to margin calls?

Financing is a leverage tool. When you are bullish on a stock but lack sufficient funds, you can borrow money from a broker to buy. For example, in the Taiwan stock market, investors typically contribute 40%, and brokers provide 60% of the funds.

Taking Apple stock as an example: stock price is $150, and you only have $50. The broker loans you $100 to buy one share. If the stock rises to $160, after selling and paying back the principal and interest, you make a 19% profit—far higher than Apple’s 6.7% increase. Conversely, if the stock drops to $78, the broker will require you to top up the margin.

At this point, you face a choice: either pay out of pocket to cover the shortfall or accept the broker’s forced liquidation. This forced liquidation is what investors call a margin call or liquidation.

How Do Margin Calls Trigger Chain Risks?

Margin calls are not isolated events

When the stock price falls below a maintenance margin ratio of 130%, brokers won’t negotiate gently; they will sell your stocks at market price to cover the margin call. This often results in a sharp decline in the stock price, which can trigger further margin calls from other investors.

Once a stock experiences a wave of margin calls, its price can become oversold—far below its fundamental support. This not only clears out short-term speculators but also damages other shareholders who were not initially at risk.

Lessons from the Bill Hwang incident

His assets skyrocketed from $220 million to $20 billion over ten years, mainly by heavily leveraging to buy promising companies. But when market volatility hit in 2021, his massive holdings faced huge swings.

The key issue was: his position size was too large for the market to absorb. When brokers liquidated his stocks, it triggered a chain of margin calls. Not only did underperforming stocks plummet, but even stable holdings were forcibly sold to maintain margin requirements. Baidu was one of them, experiencing a sharp decline in the short term.

Impact of Margin Calls on Stock Market Chips

Changes in holdings cause long-term disturbances

Before margin calls, stock holdings were concentrated among stable entities—management teams, pension funds, insurance companies, etc. But forced sales by brokers shifted stocks into retail investors’ hands.

Retail investors tend to be short-sighted; they buy and sell quickly with minor price movements. This causes large funds to lose interest, and the stock price may remain depressed until significant positive news reignites market enthusiasm.

Therefore, stocks that have just experienced margin calls are usually not worth touching due to ongoing short-term downside risks.

How to Use Financing for Profits Correctly?

Financing itself is not evil; the key lies in how it is used:

Choosing the right targets is most important Financing should focus on stocks with high liquidity—large market cap and stable trading volume. Small-cap or obscure stocks, once margin calls occur, can trigger violent volatility.

Calculate financing costs Financing incurs costs. If a stock’s annual dividend exactly equals the interest on the loan, the investment becomes meaningless. You must select targets that can cover interest and generate positive returns.

Use financing to implement staggered buying If funds are limited, leverage financing to buy in stages. When prices fall, use existing capital to buy more, lowering the average cost, rather than investing all at once.

Support and resistance zone strategies When a stock consolidates near a resistance zone, paying interest without profit suggests it’s better to take profits if it cannot break through. Similarly, if it breaks support, stop-loss quickly—don’t expect a short-term rebound.

The Double-Edged Sword of Leverage

Financing is a leverage tool that can amplify gains but also magnify losses. It accelerates wealth accumulation but also speeds up wealth evaporation.

Bill Hwang’s rise from $220 million to $20 billion was driven by leverage; his $20 billion vanished within 48 hours, illustrating leverage’s destructive power.

The simple conclusion: Before investing, fully understand margin call risks, adopt disciplined strategies, and protect your capital in the era of leverage.