Recently, many people still don't understand what a margin call is, so I thought of the story that shocked Wall Street in 2021.

There was a hedge fund manager named Bill Hwang, who used a seemingly invincible method: choosing promising companies and then amplifying gains with a lot of leverage. This approach was indeed effective; in just 10 years, his assets skyrocketed from $220 million to $20 billion, making him a legend on Wall Street. But in March 2021, a black swan hit the market, and he lost $20 billion in just two days. This wasn't just simple loss, but a chain reaction caused by a margin call.

So, what exactly is a margin call? Simply put, it’s when you buy stocks with borrowed money, and if the stock price drops to a certain level, the broker fears they won’t recover the loaned money and forces you to sell your stocks. This process is called a liquidation, and from an investor’s perspective, it’s a margin call.

Let me give a real example. Suppose you are bullish on Apple stock, currently at $150 per share, but you only have $50. No problem, the broker can lend you $100, so you can buy one share. If the stock rises to $160 and you sell, you make a 19% profit. But what if it drops to $78? The broker will then require you to add more margin, meaning you need to put in more money. In Taiwan stocks, margin trading usually involves you putting up 40% of the funds, and the broker providing 60%. When the stock price falls and the maintenance margin ratio drops below 130%, the broker will forcibly close your position, which is a margin call.

Margin calls have a huge impact on stock prices. When stocks plunge and trigger a wave of liquidations, brokers just want to recover their money quickly, regardless of the selling price, and will sell immediately at market price. This causes the stock to oversell, leading to even more margin calls, creating a vicious cycle. Moreover, after liquidation, the stock holdings become very messy, and retail investors who take over tend to be short-sighted, while large funds become hesitant to enter. So, stocks that have undergone a margin call are usually not recommended for short-term trading.

Returning to Bill Hwang’s story, he held a huge amount of stocks. When his margin was liquidated, the market lacked enough buy orders to absorb the sell-off, causing a chain reaction. To maintain his margin, his other holdings were also forcibly liquidated, and eventually, all his investments’ stocks plummeted in a short period.

Does leverage have any benefits? Yes, it does. If you believe in a company but have limited funds, you can use margin to buy in stages, making your capital more efficient. But the key is to choose large-cap stocks with sufficient liquidity; otherwise, if big investors face margin calls, the stock price could fluctuate wildly. Also, pay attention to the interest costs of margin trading. Timing is crucial. If the stock is consolidating at a resistance level and can’t break through, it’s better to stop and take profits rather than keep paying interest. If the stock breaks support, you should also cut losses decisively.

Leverage is a double-edged sword, and the risk of margin calls should not be underestimated. Doing thorough research and operating with discipline are the keys to long-term investing success.