How much do you have to pay for a margin call? Starting from the lesson of Bill Hwang's $20 billion loss

How One Person Lost $20 Billion in 48 Hours

In March 2021, Wall Street experienced a shockwave. A hedge fund manager named Bill Hwang became one of the fastest losers in modern history in just two days. His story is not due to stupidity but stems from the black swan risk amplified by leverage. Hwang’s investment logic was simple: pick promising companies and use大量融資 to magnify returns. This approach allowed him to grow his assets from $220 million to $20 billion over ten years. But when the stock market experienced extreme volatility, the chain reaction of margin calls instantly destroyed everything.

Why did such a disaster happen? To understand Bill Hwang’s story, we first need to grasp what margin financing is, what a margin call is, and how much one might lose in a margin call.

What is Margin Financing? Why Does It Trigger Margin Calls?

The logic of margin financing is straightforward: you are bullish on a stock but lack sufficient funds. So you borrow money from a broker to increase your position size. For example, in the Taiwan stock market, investors typically put up 40% of the funds themselves, and the broker provides 60%. This is margin buying.

It sounds wonderful on the surface. Suppose Apple stock is $150 per share, but you only have $50. Through margin, the broker lends you $100 to buy. If the stock rises to $160, you sell, pay back the broker’s $100 plus interest, and net $59.5, yielding a 19% return, far exceeding Apple’s actual 6.7% increase.

But stocks can also fall. When Apple drops to $78, the broker will require you to top up your margin (also called a margin call) to ensure you can repay. If you cannot come up with the money, the broker has the right to sell your stocks directly. This is a margin call.

From a numerical perspective, the margin maintenance ratio is a key indicator of margin call risk. When the initial stock price is 100, the maintenance ratio is 167% (100/60). When the ratio drops below 130% (stock price falls to 78), a margin call is triggered. Brokers won’t wait for a high bid; they will sell immediately at market price.

How Much Can You Lose in a Margin Call?

Returning to Bill Hwang’s case. He held a huge amount of stock, and when forced liquidation started, the market simply didn’t have enough buy volume to absorb the sell-off. The stock price plummeted, triggering margin calls for other leveraged investors, creating a chain reaction. All his investments faced sharp declines in a short period, with some even breaking support levels and struggling to rebound.

Specifically, the loss from a margin call depends on three factors:

First, your leverage multiple. The higher the leverage, the greater the loss from the same price decline. Bill Hwang used extremely high leverage, which was the reason his assets skyrocketed over ten years and also the reason he collapsed instantly when the market turned.

Second, how deep the stock price has fallen when the margin call is triggered. If the margin maintenance ratio drops from 167% to 130% (stock price drops to 78), you’ve already lost over 20%. But if liquidity is poor and forced liquidation causes the price to fall another 5% or 10%, losses will be even larger.

Third, whether you have enough margin buffer. If your account still has idle funds, you can top up the margin during a margin call, delaying or avoiding liquidation. But if your account is fully invested and you cannot come up with cash when a margin call occurs, forced liquidation happens immediately.

For a simple example: if you buy a stock at 100 with 40% cash and 60% margin, and the stock drops to 78, you face a margin call. That’s a 22% loss. If the price continues to fall to 75 or 70 during liquidation, losses reach 25%–30%. For leveraged positions, this could mean losing 50%–75% of your original capital.

How Does Margin Liquidation Affect Stock Prices?

Margin calls are systemically damaging to the market. When a stock drops sharply and triggers margin calls,大量投資者’s stocks are sold off without regard to cost. These stocks flood into retail investors’ hands, who tend to be short-sighted and quick to buy or sell on small fluctuations, further increasing volatility. Large funds, seeing the chaos, tend to stay away until significant positive news appears.

This creates a vicious cycle: margin call → stocks flow into retail → chaotic ownership structure → large funds retreat → stock price continues to decline.

How to Use Margin Safely Without Falling into a Margin Call Trap

Margin itself is not evil; the key lies in how you use it.

Choose liquid assets. Bill Hwang’s lesson is: once a big player faces a margin call, the larger and less liquid the holdings, the greater the impact on the stock price during liquidation. Therefore, when using margin, always select stocks with large market caps and high trading volume to ensure there is enough buy volume to absorb the sell-off.

Calculate whether the cost of margin is worth it. Margin incurs interest. If the annual dividend yield of the stock is only 2%, and the margin interest is also 2%, then even if the stock price doesn’t move, you are already losing due to interest costs. Pre-calculating whether the expected gains can cover the margin costs is crucial.

Be cautious around resistance and support levels. When a stock consolidates at a resistance level without breaking through, the margin position faces ongoing interest costs. It’s advisable to take profits if it fails to break resistance. Similarly, if the stock breaks support, stop-loss immediately. Wait for a clear trend before re-entering.

Keep sufficient cash buffers. When trading on margin, don’t fully commit your account. Retain 10%–20% cash so that when a margin call occurs, you have the capacity to top up the margin and avoid forced liquidation.

Conclusion: Leverage Is a Double-Edged Sword

Margin leverage can amplify gains and accelerate wealth accumulation, but it can also speed up losses. Bill Hwang, from a $20 billion asset manager, became a margin call victim in 48 hours, teaching us a brutal truth: Discipline-less high leverage will ultimately lead to ruin.

How much can you lose in a margin call? The answer depends on your leverage multiple, timing of the trigger, and whether you have cash buffers. The best defense is to remain humble when using margin, choose highly liquid assets, calculate costs carefully, keep cash reserves, and strictly follow stop-loss and take-profit rules. Disciplined investing is the only way to win in the long run in the stock market.