Are you familiar with the concept of a margin call? Many people think only futures trading can lead to liquidation, but stock margin trading also faces the same risks. Recently, I was reminded of the classic case of Bill Hwang, who lost 20 billion USD in just two days in 2021, earning the title of Wall Street’s fastest money loser.

What can his story teach us? Essentially, it shows how terrifying leverage can be.

First, let’s talk about what a margin call is. Imagine you’re bullish on a certain stock, but don’t have enough cash. You can borrow money from a broker through margin financing. For example, if Apple stock is $150 per share and you only have $50, the broker loans you $100, so you can buy one share. If the stock rises to $160 and you sell, pay back the loan, and make a profit that doubles. But if it drops to $78, the broker can’t sit still—they’ll require you to add more collateral, meaning a margin call. If you don’t have the money to meet it, the broker will sell your stocks directly, which is called forced liquidation, or a margin call.

In Taiwan’s stock market, the maintenance margin ratio usually needs to stay above 130%. Once it falls below this line, a margin call will happen. It may seem like a personal loss, but the actual impact is much bigger.

When a wave of margin calls occurs, stock prices tend to oversell. Why? Because brokers don’t try to get the best price when selling stocks—they just want to recover their lent money quickly. A sharp decline triggering margin calls causes more investors to be forced to liquidate, creating a chain reaction, and the stock price keeps falling. Additionally, after margin calls, stock holdings become very messy; retail investors who buy in short-term will see large fluctuations, and big funds tend to stay away, causing the stock to continue drifting downward.

Back to Bill Hwang. He was a hedge fund manager whose strategy was to pick good companies and amplify gains with high leverage, i.e., buying stocks on margin. This approach allowed his assets to grow from $220 million to $20 billion in ten years, making him a Wall Street celebrity. But high leverage is most vulnerable to black swan events. During market volatility in 2021, his holdings experienced huge swings, and brokers, wanting to avoid losses themselves, forced liquidation of his stocks.

The problem was, he held such a large position that the market simply didn’t have enough buy orders to absorb it. As a result, the stocks plummeted, triggering other investors to also face margin calls. Moreover, to maintain sufficient collateral, even his other solid holdings were forcibly sold. This created a terrifying cycle—his entire portfolio faced sharp declines in a short period, including stocks like Baidu, which were dragged down as well.

Does this mean margin trading is completely off-limits? Not necessarily. Proper use of margin can make capital more efficient. If you’re bullish on a stock but have limited funds, you can use margin to buy in stages—benefiting from price increases and adding more if the price drops, lowering your average cost. But this requires choosing stocks with sufficient liquidity and market cap; otherwise, a large investor’s margin call can trigger violent swings.

Also, since margin involves paying interest, timing and stock selection are crucial. Some stocks hardly fluctuate, and their dividends may not even cover the interest costs, making the strategy pointless. Another point is, when a stock consolidates at resistance or support levels, using margin to buy can be risky. If the stock hits resistance and can’t break through, you’ll be paying interest long-term, so it’s often better to take profits. Conversely, if it breaks support, it’s hard to recover quickly, so stop-loss is recommended.

Leverage is like a double-edged sword—used wisely, it can accelerate wealth accumulation; used poorly, it can speed up losses. Margin trading is a high-risk strategy, and the risk of margin calls and liquidation always exists. Therefore, thorough research and preparation are essential before investing to avoid exposing yourself to unknown risks.