Retail investors should avoid using unverified information from social media to buy and sell stocks, the European Union's markets watchdog said on Wednesday.
Retail investors following the Reddit forum WallStreetBets in the United States piled into GameStop Corp last month, sending shares in the retailer rocketing at the expense of prominent investors who had bet against the stock, ringing alarm bells in Europe.
Although market rules and structures are different in the EU, it cannot be ruled out that similar circumstances may occur in the bloc as well, the European Securities and Markets Authority said in a statement.
There are already signs that more retail investors are piling into European stock markets.
ESMA said increased participation of retail investors in Europe is helping to deepen the EU's capital market, but they face significant risks when buying shares that are very volatile, the watchdog said.
Investors should first gather information from reliable sources and know how much losses they can bear, ESMA said.
Organising or executing coordinated strategies to trade or place orders at certain conditions and times to move a share’s price could constitute market manipulation, ESMA said.
"Similarly, special care should be taken when posting information on social media about an issuer or a financial instrument, as disseminating false or misleading information may also be market manipulation," it said.
Care should be taken when disseminating investment recommendations, including via social media and online platforms, as they are subject to regulatory requirements, ESMA added.
(Reporting by Huw Jones; editing by Jason Neely and Toby Chopra)
