Recently, I’ve been pondering a question: why do some investors lose hundreds of billions in just a few days? The story of Bill Hwang in 2021 perfectly illustrates this point.

This guy is a hedge fund manager who turned $220 million into $20 billion through massive leverage and financing. Sounds incredible, right? But when market volatility hit, his holdings collapsed directly. To protect their interests, brokers forced the liquidation of his stocks, and in just two days, he lost over $20 billion. This is what’s called a margin call.

So, what exactly is a margin call? Simply put, it’s when you buy stocks on margin, and the stock price drops. The broker, fearing they won’t recover the loaned money, forces you to sell your stocks. For example, suppose you’re bullish on Apple stock but don’t have enough cash, so you borrow from the broker. If Apple’s price drops from $150 to $78, the broker will require you to add margin. If you can’t, they’ll sell your stocks for you. This action is called a forced liquidation, or a margin call, from the investor’s perspective, it’s a margin call or a liquidation.

What I find most terrifying is the chain reaction caused by margin calls. Bill Hwang held such a huge amount of stock that once he started selling, the market simply didn’t have enough buy volume to absorb it, causing the stock price to plummet. This also put other leveraged investors at risk of margin calls, triggering more forced liquidations, and the stock kept crashing. It’s like a domino effect—one falls, and the whole line follows.

Margin calls impact stock prices in two ways. First, when a large number of margin calls happen, stock prices tend to overshoot on the downside. Because brokers sell stocks quickly without considering the highest price, stocks get hammered down very low. Second, after a margin call, the stock holdings become very messy. Stocks sold off forcibly often end up in retail hands, and retail investors tend to be short-sighted, buying and selling on small fluctuations, which can scare away big funds. So, stocks after margin calls usually keep drifting downward, and in the short term, it’s generally not advisable to buy.

But this doesn’t mean margin trading is an absolute taboo. If you believe strongly in a company but have limited funds, you can buy in stages using margin. Even if the stock drops, you still have the capital to buy more. The key is to pick the right stocks—those with large market caps and sufficient liquidity—otherwise, if a big player faces a margin call, the stock price will swing wildly.

Also, since margin buying incurs interest, choosing the right timing is crucial. If a stock hardly moves and the dividend yield is close to the interest rate on the margin loan, it’s not worth investing. Another point many overlook is that during consolidation at resistance or support levels, if you buy on margin, you’ll keep paying interest during the sideways movement. It’s usually better to take profits and sell when the stock hits resistance and can’t break through. Conversely, if the stock breaks below support, it’s unlikely to rebound quickly, and stopping loss is a smarter move.

So, in essence, margin calls are a double-edged sword. When used well, they can accelerate wealth accumulation; when misused, they can speed up losses. Bill Hwang’s story is the best lesson, showing us that reckless operations without discipline can’t be sustained even with huge capital. Before investing, especially with leverage, thorough research is essential. Never expose yourself to unknown risks.