The rate of change in society spurred by the developments in AI will almost certainly accelerate as it becomes more accessible to companies and the general public. Its usefulness and level of "intelligence" directly correlate to computers' processing power.
What does this mean for you as an investor? AI is the leading supercycle in the technology sector and will profoundly impact society. In this piece, we'll teach you how to invest in AI and the best AI companies to invest in.
Key Takeaway
AI is the fastest-growing investment trend on the market, and for good reason. The AI global market surpassed $200 billion in 2023 and should grow to $1.8 trillion by 2030. Companies increasingly use AI tools to improve outcomes, streamline efficiency and cut costs.
Understanding the Landscape of Artificial Intelligence Investments
AI is the computer science and engineering field focused on creating intelligent agents, or systems that can reason, learn and act autonomously. Intelligent agents can solve complex problems and adapt to their environment to achieve their goals.
In recent years, we've started using AI more and more in everyday applications, such as search engines, personal assistants and self-driving cars.
There are several approaches to AI, each with strengths and weaknesses. The three most common approaches include rule-based systems, decision trees and artificial neural networks.
Many AI researchers aim to create systems that can autonomously learn and improve their skill sets without human intervention. Often referred to as artificial general intelligence (AGI), it is still considered well beyond the current state of AI technology.
Types of AI Investments
Before putting any capital to work in the field of AI, you'll need to decide which type of vehicle suits your investment style. Evaluate your risk tolerance as a first step and choose assets that fit your goals. This new technology is exciting, but that doesn't mean every AI stock moves in a straight line upward.
AI Companies and Startups
The most tempting AI investments are the ones with the biggest potential, which means startups and small-cap companies (or even microcap companies) with plenty of room for growth.
For example, Soundhound AI Inc. NASDAQ: SOUN is a small-cap stock with increasing volume. At the same time, Guardforce AI Co. NASDAQ: GFAI has a tiny $25 million market cap and experiences plenty of volatility.
AI-Themed ETFs and Mutual Funds
If stock picking isn't your game, you can simply buy a big chunk of the AI industry through exchange-traded funds (ETFs) or mutual funds. The Global X Robotics and Artificial Intelligence Thematic ETF NASDAQ: BOTZ is popular because it holds large-cap and mid-cap stocks from domestic and international publicly traded companies.
Venture Capital
If you're an accredited investor looking for non-public opportunities, venture capital can be a way to get in on the ground floor of the next exciting AI innovator. Venture capital firms increased their AI investments by 20% in 2023.
Megacap Tech Giants
If you can't beat ‘em, join ‘em! Megcap tech giants like Nvidia Inc. NASDAQ: NVDA, Meta Platforms Inc. NASDAQ: META and Advanced Micro Devices Inc. NASDAQ: AMD have been some of the biggest winners in this new bull market and continue to produce massive amounts of revenue.
Factors to Consider Before Investing in AI
Some important factors worth pondering before placing any AI stock trades include:
- Risk tolerance: Can you handle the constant volatility of AI tech stocks? Even mega caps like NVIDIA can have massive price swings quickly, so AI investors must prepare for higher-than-average volatility.
- Regulatory landscape: AI-related job disruptions are sure to garner the attention of lawmakers, who can potentially throw a wrench in the spokes of AI growth. Investors will need to consider the future impact regulation could have on this sector.
- Due diligence and research: How much time can you devote to AI due diligence and research? The time you can spend researching stocks helps determine your level of risk. If you work full-time and have a family, you might not have time for extensive stock research and would prefer the convenience of exchanged traded funds.
- Geopolitical risk: Tensions in the Middle East, Ukraine and Asia have the potential to upend supply chains and reduce capacity. AI investors will need to monitor any escalation in global conflicts closely.
How to Invest in Artificial Intelligence
The rise of AI has been one of the most transformational technological advancements in recent years. As the industry continues to mature, investors can get involved in a growing number of investing in AI opportunities.
Here are a few tips on how to invest in AI.
Step 1: Define your investment goals.
Before investing in any stock, you must clearly understand your investment goals. Are you hoping to generate long-term growth, or are you more interested in short-term gains?
Your investment goals will play a significant role in determining which AI stocks are right for you. For example, if you’re primarily focused on long-term growth potential, you may want to consider investing in a company working on cutting-edge AI technology. On the other hand, if you're more interested in near-term gains, you may want to look into companies already using AI in their businesses.
Step 2: Consider the company’s business model.
Once you have a better idea of your investment goals, you can narrow down your options by considering the business models of different AI companies.
Some AI companies focus on developing and selling AI software and platforms, while others use AI to power their own internal operations. Many companies also use AI to create new products and services.
Some AI tech stocks apply their stack to optimize the growth of hemp and marijuana. Check out MarketBeat's list of marijuana stocks.
Each of these business models comes with risks and rewards, so it's important to understand how each one works before making investment decisions.
Step 3: Research the AI market.
Investing in AI stocks can be complex, so do your homework before making any decisions.
Read industry reports from analysts and research firms to research the AI market to understand better its current state and the trends driving its growth.
You can check out MarketBeat's stock lists for other stock market investing ideas.
Step 4: Consider investing in an AI ETF.
Need help determining which AI stocks to invest in? Consider investing in an AI exchange-traded fund (ETF). AI ETFs are an investment fund that tracks a basket of AI-related stocks.
Investing in an AI ETF or mutual fund can be an excellent way to diversify your exposure to the AI market. Because AI ETFs are traded on major exchanges so that they can be easily bought and sold like any other stock.
Step 5: Seek professional advice.
Investing in AI stocks can be a complex process, so seeking professional advice is vital if you’re unsure where to start.
A financial advisor can help you assess your investment goals and risk tolerance and develop a personalized investment plan.
A financial advisor might recommend learning how to invest in stocks with increasing dividends if you want to grow your income.
Learn more: 7 Best AI Mutual Funds and 8 Best Artificial Intelligence Stocks Under $10.
Strategies for Successful AI Investments
To start successfully on AI investing, you must select and stick with an investment strategy. Here are a few potential techniques to consider:
- Diversification: Concentrating your portfolio on a single stock like NVDA might produce market-trouncing gains in some environments, but you're unprotected from a bad conference call or profit slowdown. Build a diverse portfolio of strong AI stocks.
- Long-term vs short-term: Many investors have varied opinions on stocks, not because they have vastly different theses but because they have different purchase timelines and goals. A long-term investor won't have the same risk tolerance and objectives as a short-term investor. Always understand which type of game you're playing when investing in markets.
- Emerging trends and disruptions: ChatGPT changed how we think about generative AI. What will be the next major disruption? Autonomous cars and cloud computing are 2 potential disruptive technologies worked on by a wide array of AI firms.
- Experts and market analysis: Finally, listen to experts in the field and use analyst research and price targets to select securities for your portfolio. Market analysts don't always make correct predictions, but knowing the opinions of multiple experts can help you craft an investment thesis.
Risks and Challenges in AI Investments
The AI industry's volatility might scare off less risk-tolerance investors, but innovative tech companies can always be a bit of a rollercoaster. However, the industry isn't without headwinds; not everyone is on board with the new AI revolution. Here are a few challenges facing the sector in 2024:
- Job displacement: Creative destruction is a way of life in a capitalist society, but that doesn't mean those facing massive disruptions will be happy and quiet about the situation. Actors and writers in Hollywood have already pushed back on their images and scripts utilized by AI generators.
- Supply issues: Nvidia CEO Jensen Huang recently said that the company is struggling to keep up with demand for its chips. That's a great problem for NVDA, but other AI companies are battling for increasingly scarce resources.
- Regulatory drag: Fast-paced innovation combined with potential job displacement means regulators will likely have some say in the AI-inspired future. Investors must stay on top of new bills and laws that could affect the AI industry.
Future Outlook and Emerging Opportunities
Despite the potential headwinds, no one in the market feels comfortable betting against AI. The excitement is real, and the demand backs up the hype (so far). While an AI bubble may form at some point, megacap earnings have been strong, and the thirst for AI innovation is palpable.
Some industries expected to receive a major boost from AI infrastructure include healthcare, finance, cybersecurity and hospitality. The investments being made today could reap huge benefits in the future in an increasingly digital and automated world.
AI Has Enormous Potential, but Volatility Remains an Issue for High-Flying Tech Stocks
AI features heavily in science fiction, leading humanity into a new prosperous (or dystopian) future.
Regardless of what will happen in the long term, we should focus on the fact that it's heavily in demand and will provide companies with unmatched competitive advantages to those who embrace it, making them attractive additions to most portfolios.
FAQs
Here are some answers to the most frequently asked questions (FAQs) about investing in AI.
What's the best way to invest in AI?
First, define your investment goals. Your goals could involve choosing a stock for a short-term momentum play or as a long-term holding. Next, scope out companies in this list and do your due diligence by researching financials, competitive advantages and catalysts that could propel stock prices in the future.
Can I invest in AI?
You can invest in AI public companies by buying stock via brokers. Although the prominence of AI continues to rise, it may take a decade or more for it to unleash its potential fully, so prepare to hold these companies for the long term.
Which company is leading in artificial intelligence?
NVIDIA is sometimes cited as one of the best general AI companies thanks to its dominance in the semiconductor space. Other stocks like Microsoft and Amazon can leverage the technology in more specialized ways to meet business objectives.
Before you consider Alphabet, you'll want to hear this.
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