How does a stock headcut actually occur? Learn about financing risks from a $20 billion loss

An Amazing Story: Wall Street’s Fastest Loser

In March 2021, a hedge fund manager named Bill Hwang became a cautionary tale in the global financial world. Within just 48 hours, his assets plummeted from their peak, losing $20 billion and shocking Wall Street. His story is not an isolated case but a true reflection of financing risks.

His approach seemed simple: select promising stocks and amplify returns with leverage. This strategy worked well in a bull market—over 10 years, he turned $220 million into $20 billion. But when market volatility hit, this double-edged sword turned back on him.

Margin Call Meaning: Why Profits Turn into Losses?

To understand why Bill Hwang lost all his assets so quickly, first, you need to understand what margin financing is and how it can lead to a margin call.

What is margin financing? Borrowed money to increase investment leverage

Many investors focus on a stock but lack sufficient funds or want to invest a larger proportion to amplify profits. They do this through margin financing. Simply put, margin is when you put up part of the money, and the broker lends you the rest to buy stocks.

Taking Apple Inc. as an example: the stock price is $150, and you have only $50 in cash. The broker is willing to lend you $100, allowing you to buy one share in your name. At this point, you own the stock, but half of it is “borrowed.”

Good scenario: The stock price rises to $160. After selling, you pay back the broker $100 plus $0.5 interest, and keep $59.5. You made a 19% profit, far exceeding the stock’s 6.7% increase.

Bad scenario: The stock price doesn’t rise but falls to $78. The broker becomes nervous because the $100 loan is now only secured by a stock worth $78. What could happen next?

Margin Maintenance Rate: The Trigger for a Margin Call

Brokers are not charities. When stock prices fall to a certain level, they will require you to “top up the margin.”

For example, in Taiwan stocks, margin financing usually involves investors providing 40% of the funds, with the broker providing 60%. When the stock price is $100, the margin maintenance rate is 167% (100 ÷ 60). As long as the maintenance rate stays above 130%, you’re safe. But if the stock drops to $78, and the maintenance rate falls below 130%, the broker will send a margin call: “Please add funds within the specified time.”

If the investor cannot or refuses to top up, the consequence is— the broker will sell your stocks directly, called “forced liquidation.” From the investor’s perspective, this is a “margin call” or “liquidation.”

How Margin Calls Destroy Stock Prices: Chain Reaction Power

Ordinary investors facing margin calls usually sell their holdings at the current market price. But Bill Hwang was different—he held a massive position, and once the broker forced liquidation, the market lacked enough buyers to absorb the sell-off, causing the stock price to tumble.

This created a terrifying domino effect:

Step 1: Some of his holdings start to plummet sharply
Step 2: To maintain overall margin ratios, brokers forcibly liquidate his other holdings that are not problematic
Step 3: These “safe” stocks are suddenly dumped in large volumes, triggering panic
Step 4: Other investors holding these stocks also face margin risks
Step 5: More forced liquidations occur, causing a spiral decline in stock prices

Bill Hwang’s holdings in Baidu stock were among the victims of this disaster—its price dropped dramatically in a short period, with chaotic movement.

The Double Damage of Margin Calls on Stock Prices

Damage 1: Oversell
When margin calls trigger mass selling, brokers care only about recovering their principal quickly, not the selling price. They often execute trades at the lowest market price at the moment, causing the stock to plunge far below its “reasonable value.” This oversell often triggers panic among retail investors, further accelerating the sell-off.

Damage 2: Chip Distribution Chaos
After a margin call, stocks previously held stably by major holders (such as management, pension funds, insurance companies) suddenly transfer to retail investors. Retail investors tend to chase gains and sell on dips, leading to frequent trading. This causes institutional investors to lose interest, and the stock may need long-term consolidation to recover.

How to Use Margin Financing Correctly Without Getting Burned?

Although margin risks are significant, they are not entirely avoidable—it’s about using them properly.

Strategy 1: Gradual Position Building, Diversify Costs
If you like a stock but have limited funds, margin can help you build positions gradually. First buy some shares; if the price rises, take profits. If it falls, you still have room to add more in stages, lowering your average cost.

Strategy 2: Only Margin Large-Cap Stocks
This is the deepest lesson from Bill Hwang—liquidity is crucial. Large-cap stocks with high trading volume are less likely to cause drastic price swings even if a big holder gets margin called. Avoid margin on small, illiquid stocks.

Strategy 3: Balance Margin Costs and Returns
Margin involves interest payments. Some stocks have low volatility throughout the year and mainly generate income from dividends. If the dividend yield is close to the margin interest rate, the investment may not be worthwhile.

Strategy 4: Set Stop-Loss and Take-Profit at Resistance and Support Zones
Stocks often consolidate within certain price ranges. After margin buying, if the stock hits a resistance zone and can’t break through, it may stay in a long consolidation, accruing interest. In such cases, consider taking profits. Conversely, if the stock breaks support, and a rebound seems unlikely, stop-loss immediately.

Conclusion: Leverage as a Double-Edged Sword

Margin financing is inherently a double-edged sword. When used well, it can accelerate wealth accumulation. When misused, it can destroy your capital just as quickly—like Bill Hwang, who fell from the peak to the depths in just 48 hours.

A margin call means investors are forced to liquidate due to insufficient margin, often triggering chain reactions that damage the market. To use margin safely, thorough research, understanding risk boundaries, and disciplined operation are essential to avoid becoming the next big loser.

Discipline and risk management are the true weapons for long-term success in stock market investing.