Do you want to profit from the growing trend of AI tech? If YES, here is a step by step guide on how to invest in artificial intelligence without getting burned.
What is Artificial Intelligence?
Artificial intelligence, sometimes called machine intelligence is intelligence demonstrated by machines that is in contrast to the natural intelligence displayed by humans beings and other animals. Some of the activities computers with artificial intelligence are designed for include; speech recognition, learning, planning, problem solving, to name just a few.
The emergence of intelligent machines has impacted a lot of industries and also the business world. This is because the emergence of artificial intelligence has given birth to a new aspect of investment. Artificial intelligence is sparking revolutionary developments in robotics and automation, making these some of the most compelling growth markets in the technology sector.
While investment in AI and machine learning has come in and out of vogue since its inception in the 1950s, the current mix of economic forces has unleashed a wave of spending in the sector. The growth of AI over the coming years will see greater focus on new technologies, as firms seek to develop AI in its many guises, with one of the biggest changes expected to be driverless cars by 2021.
The AI market is growing rapidly, and could be worth $46 billion within the next three years, according to the International Data Corporation, based on anticipated annual growth rate of about 54%. The artificial intelligence market promises to have an enormous impact on the global economy and PwC estimates that artificial intelligence could add some US$15.7 trillion to global GDP by 2030.
A lot of investors are currently keying into this trend, and so can you. Here are things you need to know about this industry, and how you can invest in it.
Gains of Investing in Artificial Intelligence
- It is a growing industry with great prospects
As has already been estimated, the artificial intelligence industry is growing fast, and it is likely to continue in that trend for years to come. Revenues generated by AI has been estimated to have a compound annual growth rate (CAGR) of 54.4% over the next 5 years, which is more than twice the growth rate of other high-growth tech sub-sectors. This industry indeed has great prospects for an investor.
- It has many applications and high potential returns
Artificial intelligence is a technology with applications in almost every industry. This is part of what makes AI so interesting and so investable. It has the potential to disrupt a huge number of existing businesses. Over the next decade, there would be improvements in a wide range of areas. Just a few of the many major applications that could become significant include: transportation, healthcare, security, entertainment, education, personal robots etc.
- It has a lot of established companies
Many of the key players researching AI are established businesses with other concerns. Take IBM for example. Besides AI, it also has other products like data and analytics, IoT, IT security, IT infrastructure, and more. Huge companies like IBM help to lower your risk of investment because these businesses are already diversified.
Even if their AI division fails to deliver on expectations, tare many other profitable products being run by the company that can help keep your investment safe. On the downside, this may reduce profits in comparison to a smaller business focused solely on AI.
Risks You May Encounter While Investing
- The industry is highly volatile
One thing about the artificial intelligence sector is that it can quickly go down a lot and then quickly go up a lot. Investing in the technology sector can be particularly volatile, and it can be particularly difficult to predict how companies in it will perform. Facebook’s recent data scandal and the company’s loss in market value as a result is one example of the sector’s risk.
- It is highly competitive
The AI sphere is highly competitive. This is because there are a lot of heavy weigh companies investing in the industry, and they are all competing to see who would bring out the latest tech product or service. As of August 2017, CBInsights identified 33 different corporations working on creating a driverless car. Other areas are similarly competitive, and it is unlikely that every company will be a commercial success. Unless you invest in a diverse portfolio (and even then), your level of risk is high.
How to Invest in Artificial Intelligence Without Getting Burned
- Invest in Exchange-traded funds for AI
Exchange-traded funds are securities that track an index, a commodity, or a basket of assets. In the case of ETFs for investing in AI, the ETF will own shares in a range of companies that are focused on AI. By investing in the ETF, you indirectly own part of these companies (although you do not have a direct claim on them). ETFs enable you to diversify your portfolio.
But with a specialized AI ETF you rely a lot on one industry. So if AI goes down as a whole, your investment will almost certainly reduce in value. Unless you have the money to diversify away from the risk of one stock tanking, you really ought to consider an ETF (exchange traded fund) that invests in companies driving the technology behind AI.
ARKQ holds many of the above stocks, along with many others. Diversifying your holdings with an ETF like ARKQ or others (with holdings in 40 to 100 stocks) is a far better bet, unless you have a portfolio that is adequately diversified, and you plan to put “at risk” money on a stock, looking for the biggest prospect of gains over time
- Buy Ai stocks
Another way of investing in artificial intelligence is to buy stocks in related companies. While investing, you should endavour to buy stock in companies with a long term competitive advantage in the space. Competitive advantage can be said to be a company that has an access to a large amount of proprietary data. Facebook, Google, Amazon are some of those companies.
Among the biggest investors in AI include Alphabet, Facebook, Amazon and Microsoft. However, investing in individual shares is a risky approach, as you are relying solely on the performance of these particular firms. Another way of gaining exposure is through broad-based collective funds within the technology sector, which spread investments among dozens of different companies.
- Invest in individual companies
Investing in specific companies is a higher risk strategy because you are relying on the success of just a few businesses. Specific investments in businesses should be part of a wider diversified strategy. This way you can lower your risk.
There are many websites offering ‘picks’ for stocks that you could invest in. But you should always make informed choices. Investigate the companies yourself and assess their value and potential before you make any move on that regard. If you cannot do it on your own, then get a professional.
Note: The artificial intelligence market is expected to be worth $46 billion by 2020, but many investors will likely need to stay patient as their particular investing segment takes shape. For example, if you invest in NVIDIA because its graphics processors are likely to power many driverless cars, you should keep in mind that it’s likely going to take another two decades before fully self-driving cars are ubiquitous.
PricewaterhouseCooper estimates that AI will contribute up to $15.7 trillion to global GDP by 2030. If that proves true, then some AI investors could make some massive gains. But before that time comes, artificial intelligence investors need to be patient with their investments and give them time to yield.