February 18, 2021 | AtoZ Markets – European Securities and Markets Authority (ESMA), is concerned that retail traders are relying on information from social media and forums.
ESMA warns against taking social media investment recommendations
The risk warning from the European regulator came after the so-called short squeeze (short squeeze) of GameStop shares, triggered by purchases of retail traders who coordinated their strategies on the WallStreetBets forum. In simple terms, private traders played against large hedge funds that had large sell positions on those shares.
Although the structure of the stock market in the United States and Europe differs, ESMA is concerned that similar incidents are possible on the continent.
Read also: Will There Be a GameStop-Inspired Mania in China’s Stock Market?
However, the regulator's primary concern is that inexperienced traders are taking advice from social media. Indeed, the notorious Reddit is just the tip of the iceberg. Homebrew investment advisors are present online and across all social media platforms.
"ESMA urges retail investors to be careful when making investment decisions based solely on information from social media and other unregulated online platforms if they cannot verify the reliability and quality of this information," the market regulator said.
“A key step for any investor before making an investment decision is to gather investment information from reliable sources, while taking into account their investment objectives, diversification benefits and the ability to bear losses.”
Retail traders need to understand the risks of volatility
The regulator stressed that the participation of individuals in the stock market is encouraged, but they need to understand the risks of volatility.
“Retail investors face significant risks when investing in highly volatile stocks,” ESMA warns. “Volatility is growing under the influence of many factors, including when stocks are prone to short selling. Price trends can suddenly reverse, subjecting retail customers to heavy losses. ”
Read also: SquaredFinancial Backs Retail Traders with Unrestricted Access to GameStop
ESMA and observers in selected EU countries are currently analyzing the markets and considering additional measures to protect against risks.
Think we missed something? Let us know in the comment section below.