Aug 4, 2024
Written by:
John McDowell
Artificial Intelligence (AI) and generative AI technologies like ChatGPT and Google Gemini have taken the world by storm, with almost every industry rushing to adopt them to keep pace with the fast-changing technology landscape. AI has become a vital part of investment firms where they leverage its power to streamline their internal processes and integrate it into their trading platforms, investing advisory, wealth management, and various other offerings.
With AI now becoming mainstream and readily accessible to retail traders and investors, pioneering investors and traders are using various AI tools to improve their investing and trading decisions.
In this article, we will explore how investors can use AI tools to boost their investment returns and discuss the potential risks of relying solely on AI-driven decisions. Further, we will highlight AI stocks that are benefiting from the current trends in trading and suggest a few handy AI investment strategies.
Artificial intelligence is a technology that enables machines, such as computers, to replicate human-like intelligence by analyzing data and patterns and learning from it. Computers are trained on the data fed to them using methods like machine learning and deep learning, allowing machines to output results, give insights, and solve problems based on the learnings from the provided data.
The investing world has been using AI for quite some time now. Some areas where it is extensively used include algorithmic trading, risk management, investment advisory (robo advisors), wealth and portfolio management, and sentiment analysis, among others.
Algorithmic trading uses AI algorithms to analyze chart patterns and perform automated, high-frequency trades. Hedge funds, investment banks, and large financial institutions use algorithmic trading to trade financial instruments at high speeds. However, the technology has flourished and has made its way to various retail trading platforms as well. This has now enabled individual investors to set up their trading strategies in algorithmic form on their trading platform of choice and let the software do the trading on their behalf.
Algorithmic trading eliminates an individual’s emotional bias from trading decisions, entrers and exits trades automatically based on programmed instructions, and frees trading unnecessarily on intuitive hunches. As a result, the trader can focus on analyzing results and further refine their strategies, hopefully leading to a much-improved trading performance.
AI can also help investors gauge the sentiment of the market. There are plenty of tools available for investors that scan social media, news, and market data to determine market sentiment. For traders who don’t have enough time to read the news or study data about individual stocks, sectors, or the overall market, AI sentiment analysis tools can make the task easier. Some tools aggregate the important news, economic data, and economic calendar all in one place to make it convenient for traders to filter through important information, help them understand market sentiment, and make informed trading decisions.
Robo advisors are AI-powered software platforms that provide wealth management services to investors. With robo advisors, investors have access to advisory and portfolio management services 24/7, without the need for booking appointments or checking for the availability of a human advisor.
These are inexpensive and cost only a fraction of what human financial advisory services cost to provide similar services. They are most suitable for average investors; high net-worth investors who require specialized services would be better off choosing a human financial advisor to provide customized wealth planning services.
Many hedge funds and financial services firms provide investors with access to robo advisors and charge a nominal fee. Investors fill out an online questionnaire that enables the robo advisor to determine your risk profile, investment horizon, current financial condition, and desired financial objectives. Based on your profile, the robo-advisor crafts an investment strategy and allocates your funds to different asset classes.
Trading simulators let traders learn and test their trading strategies in a simulated market environment with virtual money. These are primarily meant for beginner traders who want to get familiar with the user interface of the platform, order placement, order types, technical indicators, chart types, and types of tradable products.
Some of these simulators are designed to work as education tools using built-in AI technology that make learning like playing an exciting video game. After a user creates their profile on the platform, the tool tracks their progress, identifies their weak areas, and automatically tailors lessons to cover those areas.
Tradingsim offers a great simulator for these purposes.
Predictive analytics platforms leverage the abilities of generative AI and machine learning to analyze large amounts of historical data to make predictions about the future trend of the asset. The advancements in AI have given rise to numerous new startups that provide a range of services to not only retail investors and traders but to brokerage houses as well.
Brokerage firms routinely use AI for stock ranking, earnings prediction, target price estimation, and various other tasks. Depending on the trading platform you use, it will have AI-driven solutions in one form or another that you can use to improve your trading.
Artificial intelligence stocks are the stocks of companies that are involved in creating and developing AI technology, or in some way connected to that industry. NVIDIA Corporation (NVDA), Alphabet Inc. (GOOGL), IBM (IBM), Intel Corporation, Meta Platforms, Inc. (META), and Microsoft Corporation (MSFT) are some of the larger, more well-known companies that are actively involved in developing AI and incorporating it into their offerings. If you are looking to include some AI stocks in your portfolio, there are plenty to choose from. Just make sure you do your research first.
Let’s take a look at how these companies are contributing to the advancement and delivery of AI technology to industrial as well as individual consumers.
**Disclaimer** Thes are by no means recommendations to buy or sell securities. Please consult a licensed financial advisor and do your own research before investing. Investing is inherently risky.
NVIDIA is a manufacturer of Graphics Processing Units (GPUs) that have a wide range of applications in industries like AI, robotics, gaming, autonomous driving, and numerous other areas. Deep Learning machines are a critical part of AI and require specialized GPUs with the right amount of acceleration to perform the tasks appropriately without any bottlenecks.
The demand for NVIDIA’s GPUs are expected to rise with the accelerated advancements and growing investments in AI technology by companies across the globe. On 18th June 2024, NVIDIA’s stock reached its all-time high, making it the world’s most valuable company with a market capitalization of $3.34tn.
Google is also investing heavily in AI technology with its own Google AI division that focuses on AI projects. Some notable projects Google is working on include Google Assistant, Google Vids, TensorFlow, Magenta, and LaMDA, among many others.
The competition has been growing among tech companies in the AI space with the rapidly changing technological environment. When OpenAI launched its generative AI chat platform ChatGPT, it pushed Google to fast-track its own generative platform Gemini (formerly Google Bard) to remain users’ primary option for making search queries on the internet. Further, Google has been incorporating AI into many of its products like Google Search, Google Maps, YouTube, Google Assistant, Image Search, GMail, and Cloud.
IBM is another prominent company actively involved in AI development. The company offers several Core AI platforms (Watson and Watsonx), AI-driven solutions (Watson Assistant, Watson Discovery, IBM OpenScale, and Cloud Pak for Data), and industry-specific solutions for various industries such as finance, retail and healthcare. For example, in the finance space, it is rolling out its IBM Safer Payments platform for fraud detection and risk & compliance management.
In retail, the company’s AI solutions include supply chain optimization, marketing, and inventory management. Its Master Data Management solution is another attractive option for large organizations, providing quick insights and delivering a unified view of a company’s data.
Meta, formerly known as Facebook, has also integrated AI into its core products like Facebook, Instagram, and WhatsApp. Its advertisement and content recommendation algorithm is also centered on AI that targets users based on their observed browsing behaviors. Further, the company is directing its R&D efforts toward improving Augmented Reality technology as well as its AI language Model, Llama. The company plans to invest $35 to 40 billion dollars in capital expenditures on AI and metaverse development by the end of 2024, signifying the importance it attaches to the AI market.
There are plenty of other large and prominent organizations investing heavily in R&D into AI technology. The investments by technology companies in AI could prove fruitful for shareholders and investors in the form of high potential earnings and increased profitability. Yet, as always, manage your risk when considering any type of investment.
Investors and traders now have access to a wide range of AI tools to aid in their analysis of financial markets, craft investment strategies, and streamline plenty of other related tasks. Here are some common AI investment strategies to consider:
Financial reports published by companies are quite lengthy and extensive, and require considerable time to study in detail. But since generative technologies like ChatGPT and Gemini can analyze and summarize large amounts of data, you can upload the data to these tools and read the summarized version of the report and the key insights from the data.
AI tools can quickly generate key metrics such as year-over-year revenue growth, profit margin, return on equity, earnings per share, among others, allowing you to learn about the company’s fundamentals. Based on the uploaded data, you can infer any type of information by simply typing a prompt in the tool, which enables you to focus on important information while skipping the unimportant parts of the report.
AI tools allow investors and traders to analyze the markets and different asset classes in depth, enabling them to adapt their investing and trading strategies accordingly. Some examples of the AI tools that investors can use include stock screeners, market screeners, watchlist generators, short interest data, earnings calendars, mutual fund finders, fund comparisons, etc. Depending on your investing strategy, you can choose the tools that best suite you.
For example, an investor contemplating an investment in mutual funds can use a mutual fund finder tool for filtering the available mutual funds based on the investor’s criteria. Similarly, an investor who wants to track individual stocks in his portfolio can use an earnings calendar to know about scheduled earnings reports then generate a watchlist to track how a collection of stocks have been performing over a certain period, and stock screeners to filter different stocks for the portfolio based on defined criteria.
Almost every trading platform has risk management tools in place that enable traders to set "stop loss" and "take profit" points on their trades. Traders can place different types of orders, such as market orders, limit orders, fill or kill orders, etc. that help traders in executing their trades according to their desired strategy.
Some AI tools let traders determine their optimal trade size, taking into account risk percentage per trade, stop loss, and the type of instrument being traded. Many trading platforms let traders have a dynamic stop loss instead of a fixed one. For example, if you are long on a stock and have placed a stop loss five points below the entry price, when the price rises by one point, the stop loss will move up dynamically with each one-point increase in price. This lets traders lock in some of the profits in case the price recedes after some time.
If you find yourself too busy to analyze stocks to build your portfolio, you can use the services of robo advisors to create a portfolio of stocks or a combination of different financial assets. As mentioned above, robo advisors are AI-powered and can create a portfolio based on your risk tolerance, investment horizon, and your investment goals. Robo advisors use large amounts of data to analyze different assets and allocate your available funds into different asset classes. They will also rebalance it periodically so that your financial objectives can be achieved as planned.
Artificial intelligence is the future, which is the reason why companies in every industry are integrating it into their internal systems and product offerings. The investment industry is no different. Investors and traders alike have access to all sorts of extremely capable AI tools that can help them with their investing and trading activities.
However, relying solely on AI can backfire as the AI technology is still in its developmental stages and can produce errors in generating results. A better option would be to complement the analysis rendered by the AI tools with your own intelligence. Further, the more reliable the data you feed into the AI tool for analysis, the better would be the generated results.
Because the machine learning process is automated, the algorithm with which the machine or system generates its output is often inexplicable. Due to this, errors in the model can be hard to rectify. Despite the efforts put into AI to replicate human intelligence, AI still struggles with general intelligence and contextual awareness. For example, in the investing and trading context, the stock market and the related price action depict traders’ emotions (optimism, greed, pessimism, fear of missing out, etc.), which AI can’t comprehend well.
The best way to use AI in your trading and investing decisions is to be aware of its limitations and also use your judgment to arrive at the best possible decision. AI should be used as an aid rather than relying on it completely.
Here's to good fills!
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