6 Ways AI is Being Used for Investing & 3 Benefits

By Chika


Last Updated: April 10, 2023


The launch of ChatGPT created a lot of uproar about what the future of AI holds.

In investing, some are beginning to experiment with the possibilities of leveraging Artificial Intelligence to optimize their portfolio returns, assess risk, or forecast market trends.

A 2023 survey found that 41% of respondents would make an investment decision based on guidance from AI like ChatGPT. AI provides an exciting opportunity for long-term investors, especially as traditional sources of investment management are becoming increasingly commoditized.

However just as there are benefits, there could also be demerits to using AI for investing purposes.

Here's what you need to know about AI investing to make a well-informed decision. 



What is AI Investing?

AI investing utilizes complex algorithms to make investment and transaction decisions on your behalf. Through the use of AI, investors can deploy sophisticated mathematical models and algorithms to make investment and transaction decisions.

AI algorithms are designed to mimic the decision-making process of a human investor, but on a much larger scale.

This implies that AI can analyze large amounts of data such as news, financial statements, and market trends to identify and invest in promising opportunities at a faster rate. This automates the investing process, making it more efficient, error-free, and less time-consuming.



6 Ways AI is Being Used for Investing

1. Algorithmic trading.

AI can be used to devise algorithmic trading strategies.

Using AI-driven algorithms, trading strategies identify profitable trading opportunities and execute transactions automatically. Multiple equities can be traded simultaneously using these algorithms, allowing investors to make more profitable transactions with less effort.


2. Forecasts about market trends.

AI can be used to analyze vast quantities of data and predict the trajectory of the markets.

This information can be used to identify market trends and determine which securities to purchase. AI can also be used to identify patterns in the data that would have otherwise gone unnoticed. With AI, investors can potentially make more informed decisions and increase their profits.


3. Portfolio management.

The investment process can also be automated using AI.

Automated investment systems are gaining popularity because they enable investors to trade without manually entering data or analyzing the market.

By autonomously rebalancing portfolios in response to altering market conditions, AI-powered programs can also aid in the management of portfolios more effectively.


4. Tracking investor sentiment.

Through the use of natural language processing (NLP), investors can use AI to comb through millions of articles and identify shifts in public sentiment using more data than humans by analyzing:

  • news articles
  • social media posts
  • other online conversations

Al can be deployed to analyze the text and context of conversations to determine the key topics and sentiments associated with specific investments through algorithms. This information can then be utilized to generate a sentiment score for each investment.

In addition, AI can be used to monitor the performance of investments and identify potential sentiment trends among investors over time.


5. Investment advice.

By analyzing market trends and individual risk profiles, AI can provide tailored investment advice for a person’s specific needs.

This makes it easier to diversify investments and reduce overall risk. AI can also provide insights into future stock performance, allowing investors to make informed decisions.


6. Fraud detection.

Programmable AI algorithms can detect fraud and suspicious activity much more quickly than humans.

Fraud detection algorithms will prevent financial losses and improper transactions. Also, unlike humans, AI doesn't have to take vacations. Consequently, it can monitor investments and economic activity to safeguard your funds.



3 Benefits of Using AI to Invest

1. Speedy analysis of data.

Through the use of AI, you can increase the level of speed when analyzing the market which could lead to a faster decision-making process.

The time advantage which AI provides could be the difference between profit and loss.


2. Reduced investment costs.

By deploying AI, you save on investment costs. There is less need to use financial experts or fund managers to manage your portfolio or make investment decisions.


3. Diversification of portfolios.

AI can also be used to restructure your portfolio quickly, based on market trends and pre-set parameters.

As such, you do not need to be constantly monitoring your portfolio or market. 

Read this next: Should You Use a Robo-Advisor? 5 Advantages & 4 Downsides



5 Cons of Using AI to Invest

1. Impossible to predict the market.

AI uses parameters and mathematical calculations to predict market trends and make decisions.

As such, if certain conditions are fulfilled, the algorithms make concurrent decisions. This suggests that it is possible to predict the market. However, experience has long shown that trying to predict the market never works well. 


2. Lack of human oversight.

Though AI is designed to free up time and human decision-making process, it still requires human input to make it effective.

A lack of human oversight can lead to investment mistakes. As such, the benefit of an easier or faster decision-making process is partly defeated by the need for human oversight.


3. AI models may need frequent changes.

Market trends are constantly changing due to the interaction of many factors.

Investment strategies which worked in the past may not be effective in today's financial markets. Also, human emotions are fickle and could change at any minute, making it hard to predict.

As such, the efficacy of an AI model is dependent on constant review and frequent changes to keep it up-to-date with current trends. 


4. Difficulty in assessing the effectiveness of AI strategies.

It may not be easy to assess the effectiveness of AI strategies until you go live.

Even though several brokers provide demo trading features, this is different from when trading with real money, when you are contending with your emotions and the trading activities of other players in the market. 


5. Over-reliance on automated decision-making.

AI investing makes the process faster, but you run the risk of over-relying on algorithms rather than your own experience and knowledge.

As such, this makes you less of a trader or an investor and more like a robot that takes decisions based on certain parameters. 



The Final Word on AI Investing

Artificial intelligence has entered the world of investing, bringing financial knowledge once reserved for the affluent to average investors around the globe.

It can analyze the economic history of a stock, determine what factors influence its performance, and categorize securities. 

Importantly, it can also assess the riskiness of investment and prevent investors from acting rashly. Ultimately, this technology could assist even more individuals in accumulating wealth and achieving financial independence.

In general, AI is gaining importance as an investment instrument.

AI can provide investors with valuable market insights and facilitate the automation of the investment process. With AI, investors can potentially make more informed decisions and increase their profits.

Photo by cottonbro studio


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