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How To Use AI To Invest in Stocks (Complete Guide)
Ruby Layram
25th Jun 2024
Ever since the launch of ChatGPT in 2022, people can’t stop talking about AI! Over the last 2 years, artificial intelligence has crept into the investing space, providing investors with multiple use cases that can save time and minimize human error.
The concept of using AI to invest is very appealing. Imagine being able to sit back and let a robot find winning investments for you! Doesn’t that sound great?
Investing with AI is a little bit more complex than this. However, it is possible to use the technology to help you with various aspects of investing. In this guide, we will cover how to use AI to invest in stocks. We will focus on 6 ways that you could use AI as part of your investing strategy as well as tips for reducing the risk of using artificial intelligence to invest.
- 6 ways to invest with AI
- How to use AI to invest in stocks
- Risks of using AI to invest in the stock market
- Top tips for staying safe when using AI to invest
6 Ways to Invest with AI
Investing with AI doesn’t necessarily mean letting a robot do all of the work for you!
There are various different ways that you can use AI as part of your investing strategy to make the process of finding investments a bit less time consuming.
Artificial intelligence can help you to conduct analysis, interpret data, optimize your portfolio and even place orders. In the following section, we will take a look a 6 different ways to use AI in your strategy.
Also see: 5 AI investing apps that could make your life a little easier!
1. Algorithmic trading
One of the most popular ways to use AI for investing is algorithmic trading.
This involves using a pre-programmed software to buy and sell assets in an automated way. The software is programmed according to specific parameters (usually set by experts) and AI is used to execute trades whenever the parameters are met.
Algorithmic trading platforms often advertise themselves as a ‘passive’ way to trade. However, this type of trading is very risky and is most suitable for advanced traders.
If you do fancy trying algorithmic trading, opt for a licensed platform that offers risk management tools and supports long-term strategies rather than high-risk day trading.
The main appeal of algorithmic trading is that analysis and portfolio management is done for you by AI. All you have to do is fund your account, set your preferences and monitor the performance.
2. Portfolio optimization
Algorithmic trading isn’t for everyone. It is very risky and can be emotionally draining!
Luckily, there are many other ways that you can use AI to invest that carry slightly less risk.
One exciting use case is portfolio optimization and management. This involves using AI to assess your portfolio and make suggestions for improvements.
AI portfolio optimization tools can make decisions based on your individual goals, strategy and budget. It can be a very helpful way to get a third-party perspective of your investing portfolio.
If you decide to use AI for portfolio optimization, stick to reputable platforms that use advanced technology and have proof of their success.
3. AI stock pickers
Here’s one for those of you who want to save time!
AI stock pickers are tools that conduct research and analysis on your behalf. The tools then use the information that they collect to pick out stocks and shares that could be suitable for your portfolio.
This could be a good way to use AI if research isn’t your strong point! However, it is important to understand that the market is volatile and AI cannot predict the future. The stocks that are selected by these tools aren’t guaranteed to be winners.
4. Robo advisors
A Robo Advisor is exactly what it sounds like – an AI ‘advisor’ that can provide investing guidance and manage your portfolio on your behalf.
Robo advisors use data-driven insights to build diverse portfolios that align with individual preferences and goals.
You can think of these tools as a financial advisor that doesn’t cost and arm and a leg!
Some Robo Advisors provide fully-automated services which means that you don’t need to intervene. Others provide semi-automated services that require your input.
The most suitable tool for you will depend on your risk tolerance, investing experience and goals.
5. Data analysis and interpretation
Using AI to manage your investments can be risky! Instead, some investors may prefer to use AI for stock market research and analysis.
One way that you can do this is to use AI to interpret stock market data. This involves purchasing an AI software that can collect data, perform analysis and provide relevant insights.
This can save you a lot of time and provide advanced market insight which you may not have been able to gather yourself.
6. Sentiment analysis
Data is not the only component of research that AI can be used for. You can also use AI to perform sentiment analysis – a fancy term for how bullish or bearish the market is about a particular asset.
You can find out the meaning of more fancy investing terms in our financial jargon dictionary.
Sentiment analysis tools scan news, social media posts and other text and categorize each text as positive or negative. The tools then provide an overview of the sentiment by collecting an ‘average’ of the findings.
If the majority of text is positive, the sentiment analysis tool will conclude that sentiment is bullish (this means that the market is expected to move upwards).
However, if the majority of text scanned is negative, it will provide a bearish result (this means that the market is expected to move downwards).
This AI investing use case can save you from sifting through hundreds of news articles and social media posts yourself.
How to use AI to invest in stocks
To invest with AI, you will first need to decide which of the above AI tools you would like to use.
Algorithmic trading and robo advisors both come with high risk. However, they are also the most ‘passive’ AI tools that can do all of the work for you.
More risk-averse investors may prefer to use AI for stock market research rather than handling their money. In this case, you might want to consider AI stock pickers, data analysis tools or even portfolio optimization tools.
It is possible to use a combination of different AI tools as part of your investing strategy. For example, you could use a stock picker and a data interpretation tool to find investment opportunities.
Once you have decided which AI investing tools you would like to use, you should spend time shopping around for the best ones!
There are a lot of options in the AI space and an increasing number of reputable brokers have started offering their own AI services. Take your time to read product reviews and test different tools where possible before making a final decision.
Risks of using AI to invest in the stock market
Without sounding like a broken record, using AI to invest in stocks comes with risk.
Just like humans, AI tools cannot predict the future. This means that there is no guarantee that the stocks picked by AI will provide returns.
Furthermore, algorithmic trading tools and robo-advisors often rely on historic data to guide decision making. This means that the tools make trades based on the performance of stocks in the past.
Although history does have a habit of repeating itself, it isn’t always the case! The stock market is volatile which means that patterns may not always play out in the same way.
Another big risk that comes with using AI to invest is the risk of being too passive. It is important that you monitor your portfolio and conduct your own research, alongside the AI tools, to check that the insights provided by AI are reliable.
Try to find a 50/50 split whereby you use AI to support your investing strategy rather than solely relying on the technology to manage your money!
Top tips for staying safe when using AI to invest
To finish off our investing guide, we wanted to share some helpful tips around staying safe when using AI to invest.
The tips below can be used to reduce the risk of investing with AI but will not make it disappear completely! Always make sure that you can afford to lose the money that you invest.
- Diversify your portfolio: Make sure that you are investing in a basket of stocks and shares to minimize the effects of big losses.
- Use demo accounts to test AI tools: Demo accounts allow you to test new tools without putting any real money at risk. Use these accounts to familiarize yourself with AI before using real funds.
- Research as much as possible: Take time to read reviews and compare different tools before making any decisions. It is important that you find the right tool for your investing goals.
- Stay informed: Don’t let the AI do everything! Make sure to regularly monitor your portfolio, update yourself on market news and conduct research to check that the AI is making reliable decisions.
2024 is a very exciting time for investors with hundreds of shiny new AI tools on the market. If you would like to use AI in your investing strategy, start with a tool that is relatively low-risk before introducing more advanced AI systems into your tool kit.
Remember, AI cannot predict the future and there is no magic tool that can make you a billionaire!
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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