I recently recalled the story of Bill Hwang. This guy lost 20 billion USD in just two days in 2021, becoming the fastest person on Wall Street to lose money. On the surface, it looked like he was liquidated, but the underlying logic was actually an extreme example of what happens when margin calls lead to liquidation. Many people have heard the terms “liquidation” and “margin call,” but few truly understand the risks involved.

Let’s start with the basics. Buying stocks on margin, put simply, means borrowing money from a broker: you contribute a portion, the broker contributes the rest, and together you buy stocks. Sounds good, right? You only need 40% of the capital to control 100% of the shares, and when the stock rises, your returns double. But the problem is that when the stock falls, losses also double.

Here’s a real-world example. Suppose Apple stock is $150 per share, and you only have $50. The broker lends you $100, and you buy one share. When the stock rises to $160, you sell it to repay the loan and make a 19% profit—looks amazing. But what if the stock drops to $78? The broker will come to you and say, “Bro, you need to add margin.” In Taiwan stocks, margin financing typically has investors put up 40% and the broker put up 60%, with an initial maintenance margin requirement of 167%. When the maintenance margin drops below 130%—meaning the stock price falls to $78—the broker will require a margin call. If you can’t come up with the money, the broker will sell your shares directly. That’s the consequence of a margin call and liquidation: forced liquidation.

How damaging is margin-call liquidation to the entire market? The first impact is that stock prices get hammered into oversold territory. Retail investors may hesitate to sell when they’re losing money, but brokers don’t care about that—they just want to recover the money they lent out, so they sell at market price, even at lower prices. When large numbers of margin shares are forcibly liquidated, these sell-offs trigger a chain reaction, further triggering margin calls for other investors, and the stock price keeps sliding all the way down.

The second impact is more hidden. After liquidation, the shares that brokers sell flow into the hands of retail investors. These retail investors tend to be short-sighted, buying and selling with small price swings. When large capital sees this, they don’t want to enter the market, and the stock can fall into a long period of sideways-to-downward movement unless there is a major positive catalyst to attract new funds.

Back to Bill Hwang. He’s a private fund manager, and his strategy was to use heavy leverage to amplify returns. In just 10 years, his assets skyrocketed from $220 million to $20 billion, making him a high-profile figure on Wall Street. But the biggest risk for high leverage is black swan events. In 2021, market volatility caused the value of his positions to swing. To stop losses, brokers forced liquidation. The problem was that he held such a large number of shares that the market simply didn’t have enough buy orders to absorb the selling pressure. Once selling started, it triggered margin calls from other margin investors, creating a stampede effect. Not only were the losing stocks liquidated, but even stable holdings were forced to be sold in order to maintain margin requirements. In the end, all the stocks he invested in faced sharp declines in a short period.

So how can margin-call liquidation be avoided? Actually, margin itself isn’t inherently bad—the key is how you use it. If you’re bullish on a particular stock but your funds are limited, you can buy in batches using margin to lower your average cost. But you must choose stocks with enough liquidity and sufficient market value; otherwise, if a large investor gets a margin call, the stock price will swing violently. Also, pay attention to the interest cost. For some stocks, the annual dividend payouts aren’t enough to cover the interest, in which case using margin is unnecessary. And you should respect technical analysis: when a stock can’t break through in a pressure zone and starts consolidating, it’s recommended to take profits directly—don’t let interest quietly eat away at your gains. Similarly, if the stock breaks below support, cut losses decisively and don’t keep hoping for a rebound.

Leverage is like a double-edged sword. Use it correctly and it accelerates wealth accumulation; use it incorrectly and it accelerates losses. Margin trading on stocks is high risk, and the risk of margin-call liquidation is even more one you can’t afford to underestimate. Before investing, you must do your homework to truly control the risks.