What happens when a margin call occurs? Starting with the story of Bill Hwang losing 20 billion

The shocking event on Wall Street in March 2021 made all investors see a clear reality: What happens when stocks get liquidated? The answer is instant huge losses. Hedge fund manager Bill Hwang lost $20 billion in just 48 hours. This is not an isolated case but an inevitable result of uncontrolled leverage.

Chain reaction after forced liquidation: why do stocks plummet rapidly?

When investors buy stocks on margin, the biggest fear is “forced liquidation.” But this process is far more complex than imagined—How does stock liquidation develop into a market crisis?

Suppose you buy $1 million worth of stocks with margin, putting in $400,000 yourself and borrowing $600,000 from the broker. When the stock price drops to a certain level, the broker calculates the “maintenance margin ratio” falling below the warning line of 130%, and demands you to add more collateral. If you cannot meet the margin call, the broker will sell your stocks directly, marking the start of margin liquidation.

But the problem doesn’t stop there. To quickly cut losses, brokers often adopt a “cost-agnostic sale” strategy—immediately selling at market price without waiting for higher bids from investors. When a large volume of stocks is liquidated en masse, prices can overshoot to well below their intrinsic value, triggering second and third waves of liquidations, creating a self-reinforcing downward spiral.

Lessons from Bill Hwang: how large investors’ liquidations trigger market explosions

Bill Hwang’s story illustrates why stock liquidation can evolve into systemic risk.

Through high leverage, he grew his $220 million assets into $20 billion over 10 years. But in 2021, when the stock market shook, his large holdings faced crisis. When brokers forced liquidation of millions of his shares, the market lacked enough buy orders to absorb such massive selling.

The result was a chain disaster: not only did the heavily liquidated stocks crash, but even his high-quality holdings (like Baidu) were forcibly sold to maintain margin. In a short period, all his stocks faced sharp declines simultaneously, with losses accelerating at a record pace in modern financial history.

Long-term damage of liquidation to the stock market ecosystem

How does stock liquidation affect the stock’s own prospects? The impact is far-reaching.

After margin liquidation occurs, the stocks are forced into the hands of retail investors. Due to limited capital and unstable psychology, retail traders tend to trade frequently on small price fluctuations, leading to a fragmented ownership structure. Long-term investors and internal corporate teams (considered stable holdings) have already exited, leaving behind noisy traders. Large funds tend to avoid such stocks. As a result, the stock continues to drift downward until a major positive news can reverse the trend.

Therefore, the intuitive advice for investors is: Avoid stocks with liquidation risk. But a smarter strategy is to understand the liquidation mechanism and reduce exposure at critical moments.

How to use margin without being harmed by leverage?

Since leverage carries significant risks, why do investors still use it? Because margin itself is not the enemy; uncontrolled leverage is.

The first principle is to choose assets with sufficient liquidity. Large-cap stocks, even if sold off, still have enough buy-side support to prevent overselling. In contrast, small-cap or illiquid stocks, once margin liquidation occurs, can experience extremely volatile price swings. This is also a lesson from Bill Hwang— the larger the position, the more important liquidity becomes.

The second principle is to balance the cost and return of margin financing. Margin interest is not negligible. If you invest in high-dividend stocks, but the annual dividend yield is only slightly higher than the interest paid on margin, the investment has no profit margin.

The third principle is to set clear stop-loss and take-profit points. If a stock rises to a resistance zone but cannot break through, it may enter a prolonged consolidation phase, during which you continue paying margin interest. At this point, it’s better to take profits and exit rather than let interest erode gains. Conversely, if the stock breaks support levels and short-term upward momentum stalls, stop-loss immediately—don’t wait for a rebound.

Conclusion: leverage is a double-edged sword

What happens when stocks get liquidated is not just “losing money,” but also revealing the market’s fragility and individual investment limitations. High leverage can accelerate profits in good times but also speed up losses during black swan events.

Using margin to buy stocks is an effective way to leverage capital, but only if investors have full risk awareness and discipline. Doing thorough research, choosing the right assets, and controlling leverage multiples are essential to prevent exposing your investments to unknown risks.