Social Media Platforms’ investment recommendations. What are the risks?

Social Media Platforms’ investment recommendations. What are the risks?

December 9, 2021

Social media driving retail trading activity is a trend that is changing the market dynamics nowadays. Wild fluctuations in stock and crypto prices stir a range of feelings among investors, i.e., envy, confusion, and fear of missing out. However, the majority of the online traders are confused, wondering how to get in on the action. Lack of training/education and understanding of underlying risks, pushes many novice traders for cues from social media stock forum postings. Postings by individuals and social media influencers on various online forums have a survivorship bias characteristic. Survivorship bias excludes the failures and amplifies the successes. Most of the posts do not reveal overall individual trading performance, lack transparency, and mainly concern personal opinions. This lack of information distorts the facts and statistics, making success seem more probable than it truly is. Amid growing concerns about the abovementioned issue , the European Securities and Markets Authority (ESMA) has issued a warning to investors and online posters. You can find the statement here.  

What is an Investment Recommendation?

      EU Laws (such as  Market Abuse Regulation) may consider the sharing of opinions and contribution to offline or online discussion as an investment recommendation. Specific rules apply when giving such advice.  

What is the issue ESMA’s statement wants to raise?

ESMA wants to warn about the risk connected to trading decisions exclusively based on exchanging views, informal recommendations and sharing of trading intentions through social networks. Investors need to be careful when making investment decisions based exclusively on information from social media and other unregulated online platforms. Furthermore, they should verify the reliability and quality of that information. ESMA considers that investment recommendations must be objective and transparent so that investors can distinguish facts from opinions before making any investment decision. It is also crucial that investors are able to easily identify the source of information and any conflicts of interest of those making the recommendations.  

How to share investment recommendations on social media platforms?

      Individuals are urged to:
  • Disclose their identity;
  • Disclose their sources, distinguish facts, interpretations and price targets;
  • Indicate the date and time of their recommendation;
  • Disclose any interests or conflicts of interest;
  • Summarise methodology, planned updates, previous recommendations etc.
 

Which are the consequences of not following the rules?

      If the rules relating to investment recommendations are not adhered to, there can be fines or further supervisory actions. These supervisory actions may include the referral to Public Prosecutors for market manipulation.  

How can we help?

CX Financia Ltd consists of a team of experienced consultants who ensures expert guidance for regulatory matters. For more information about our services or assistance regarding anything contained in this post, please contact us via email at [email protected] .  

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