How can AI be Used for Investing?

What is AI and How it Can Help with Investing?

Artificial intelligence, or AI for short, is a hot topic in the business world lately. You may have heard this buzzword thrown around on the news or read about it in articles, but what is AI exactly?

In short, AI is a field of computer science and engineering focused on the creation of intelligent machines that can act autonomously. Unlike traditional computers which are limited to carrying out pre-programmed instructions, AI systems can learn from experience, recognize patterns and make decisions based on probabilities.

This makes them ideal for tasks such as data analysis, speech recognition and fraud detection.

In the investment world, AI has already started to be used in areas such as portfolio management and stock analysis. So, how can investors benefit from this emerging technology?

In this post, we will explore the basics of AI and discuss some ways in which it can be used to improve your investing strategy.

How to Use AI for Your Investment Portfolio

There are a few ways that AI can be used to help manage investment portfolios. One way is to identify patterns in financial data that may not be detectable by humans.

The amount of data that investors need to make truly informed trading decisions is astronomical. However, due to the limits of the human brain, investors can only process so much information at once.

AI, on the other hand, can process enormous amount of data nearly instantly using complex algorithms. These algorithms spot patterns and relationships between different data in real-time, helping investors make more informed decisions about where to invest their money.

Moreover, using a very sophisticated branch of AI called “machine learning”, these algorithms can learn from real-world data, re-write their own code, and ultimately become more efficient over time.

The complexity and cost of machine learning means it is generally reserved for cutting edge quant funds right now. However, there are early signs that more basic forms of AI are becoming available to retail traders.

For example, Trade Ideas (The Sovereign Investor) has developed an AI robo-advisor called “Holly”, which it includes in its stock scanning platform. Each day, Holly analyses data from over 60 different investment strategies on every stock in the US. It then combines this analysis with real-time pattern recognition to suggest trades with the greatest probability of succeeding.

For example, it can identify low float stocks breaking out to new highs on high relative volume as and when it happens.

This is essentially an advanced form of technical analysis – using historical price data to predict future prices – however it clearly makes the process much more efficient for humans.

Analysing stock price data only scratches the surface when it comes to AI, however. More sophisticated AI systems pore over “unstructured data”, such as satellite images of shop car parks, in the hope they can predict fundamental indicators such as footfall and sales.

Pros and Cons of Using AI for Investing

As you can see, there are clearly many benefits of using AI for investing, but the most important points can be summarised as:

1. Increased accuracy and precision: One of the main advantages of using AI for investing is its ability to accurately predict market movements with significantly more precision than human analysts.
2. Increased speed and efficiency: Another key advantage of AI is its speed and efficiency – it can process large amounts of data much more quickly than a human analyst, meaning that it can make more informed investment decisions in a shorter time frame.
3. Greater consistency: Unlike humans, who may be influenced by emotion or personal biases, an AI system is not subject to these distractions and will therefore make decisions that are more consistent over time.

Having said this, there are also some potential downsides to keep in mind:

1. AI is expensive: You need good data scientists and lots of computing power to develop accurate AI systems.
2. AI can make mistakes: Algorithms are not perfect and are vulnerable to “black swan events”. These are unique, unforeseen events that are impossible to model, making AI algorithms redundant.

Other ways AI can be used in finance

In addition to portfolio management, AI can also be used in other areas of finance:

1. Fraud detection: AI can be used to detect fraud in banking and finance. For example, AI can be used to monitor account activity for suspicious behavior and patterns.
2. Robo advisors: AI can also be used to create robo advisors, which are financial advisors that are powered by artificial intelligence. Robo advisors can provide personalized financial advice to customers based on their individual needs and goals.

The Future of AI and its Impact on the Financial World

Although there is much speculation about the future of AI, it is evident that this technology will continue to evolve and play a significant role in the financial world.

As AI becomes more sophisticated, it will be able to provide insights into financial data that were previously unavailable, helping investors make better decisions about where to allocate their capital and how to respond to market changes.

We can also expect to see increased automation of certain tasks, such as customer service and fraud detection. Of course, this will no doubt bring many challenges with it; however, the benefits are clear. Investors that embrace AI will be able to make more efficient investment decisions and gain an edge over their competitors.