The "liquidity trap" in U.S. stocks — avoid heavy positions in small-cap stocks

I once bought a small-cap stock on Gate (name not disclosed), with a daily trading volume of only a few hundred thousand dollars. I bought 0.1 shares, placed an order and waited several minutes for it to fill. Selling was even worse; I placed a slightly below-market sell order, and it directly pushed the price down by 0.5%.

This is called a liquidity trap. Small stocks have very thin order books, big players can't get in, and retail investors can't either. Because as soon as you buy, the price is pushed up; as you sell, it crashes. Slippage is large, costs are high.

NVDA is different; millions of shares are traded every second. Your 0.01 shares go in without even making a splash. The bid-ask spread is almost zero, and market orders fill instantly.

So now I only buy large-cap stocks with good liquidity. A simple way to judge on Gate: look at the depth of the order book. If the difference between the best ask and the second-best ask exceeds 0.5%, liquidity is poor. NVDA's spread is usually 0.01%, which is very healthy.

Although small-cap stocks seem "cheap" and "have room to grow," trading costs eat up a large part of the gains. And if you want to cut losses, you might not be able to sell. So avoid them.

This lesson also came from a small investment: 0.01 shares of a small-cap stock, losing $0.50, but learning that "liquidity comes first." Worth it.

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