Artificial intelligence has become almost commonplace. No longer confined to the realms of sci-fi, this technology is embedded in our daily lives, shaping the way we live, work, and even invest. You can find it in smart cars, vacuum cleaners, Netflix algorithms, and many other apps and gadgets.
So, it’s safe to conclude that jumping on the AI bandwagon and investing in this rapidly evolving technology could be a lucrative move. But if you’re not familiar with the fundamentals of investing, navigating market volatility can be challenging.
That’s why this article will explore the golden opportunities and hidden pitfalls of banking on the AI revolution and help you harness its potential to grow your financial future.
Buying Stocks Directly from a Company
One of the most direct ways to invest in AI is to buy shares of public companies that are involved in the development or application of AI technology. These companies may be creating AI solutions for their own products or services or selling them to other businesses or consumers.
The benefits of this approach include:
- High returns
Investing in individual stocks can generate high returns if the company performs well and grows its market share and profitability. Take Nvidia’s stock price as an example. It has increased by 730% in the past three years, driven by its strong growth in the AI market.
- Diversification
When it comes to investing, portfolio diversification is crucial for reducing risks. This approach will help you cushion against price falls by spreading your investment across various industries that utilize AI. For example, you can do this by investing in Adobe for exposure to the software sector, Alphabet for exposure to the internet sector, Nvidia for exposure to the semiconductor sector, and Amazon for exposure to the e-commerce sector.
- Innovation
A Direct Stock Purchase Plan gives you access to some of the most innovative and cutting-edge companies in the AI field. These companies are constantly investing in research and development (R&D) to create new AI-powered products and services. For example, Alphabet spent $39.5 billion on R&D in 2022, more than any other company in the world, which means that investing in such a company comes with lots of opportunities and growth potential.
However, buying stocks comes with its share of risks. These risks include market volatility, fierce competition from other players in the AI industry, and discrepancies between the book and market value. That’s why you should use a stock comparison tool that will offer analytical insight into the performance of AI stocks and aid your decision-making.
Buying ETFs
Another way to invest in AI is to buy exchange-traded funds (ETFs) or mutual funds that track indexes or baskets of AI-related companies or sectors. These funds offer a diversified and convenient exposure to the AI theme without requiring you to pick individual stocks or perform extensive research. This way, you’ll avoid putting all your eggs in one basket and betting on a single stock.
Some examples of such funds are:
- Global X Artificial Intelligence & Technology ETF (AIQ) tracks the performance of the Indxx Artificial Intelligence & Technology Index, consisting of companies that are involved in the development and utilization of AI and related technologies, such as cognitive computing, machine learning, NLP, Big Data, and computer vision. Some of the fund’s top holdings are Nvidia, Alphabet, and Tesla.
- TrueMark Technology, AI & Deep Learning ETF (LRNZ) provides exposure to companies that are actively involved in the research and development of AI and deep learning technologies. Its top holdings include Schrodinger Inc, Samsara Inc, Twilio, and Amazon.
- iShares Exponential Technologies ETF (XT) focuses on the performance of the Morningstar Exponential Technologies Index, composed of companies that create or implement exponential technologies that are expected to disrupt and transform various industries and markets. These technologies include AI, big data, cloud computing, biotechnology, robotics, and nanotechnology, while the fund’s top holdings include Palantir Technologies Inc, SoFi Technologies, and Hubspot.
Thanks to the broad exposure and low fees, mutual funds can be an excellent option if you don’t have too much money to invest and can’t afford to lose.
Invest in Private Companies
If you feel adventurous, you can join forces with private companies or startups working on cutting-edge AI projects or solutions. Although these companies may not be publicly traded or widely known, they may have the potential to make a splash in the existing markets or even create new ones with their AI breakthroughs.
Investing in private companies offers:
- High potential and high returns if the company succeeds in creating a groundbreaking product or service that can capture a large market share or create a new market. For instance, OpenAI, the company behind the ChatGPT language model, closed a more than $300 million share sale at a $27 to 29 billion valuation.
- Exclusivity, since investing in private AI companies can give you access to some of the most innovative companies in the AI field. These companies may not be widely available to other investors or may have limited funding rounds, and this scarcity can boost the value of your investment. DeepMind raised only $50 million from external investors and achieved a $500+ million exit after being acquired by Google.
It’s important to bear in mind that this investment model also means valuation uncertainty. In other words, you might be exposed to the risk of not knowing the true value of your investment. Private AI companies may not have a clear or consistent method of valuing their shares or may have inflated or deflated valuations based on market sentiment or expectations.
In Closing
Investing in AI-focused stocks, ETFs, and private companies offers exciting opportunities to be part of technological advancement. On the other hand, you’ll face some unique risks and complexities. Thorough research, understanding the AI landscape, and potentially seeking professional guidance are key to navigating this investment frontier. Whether you’re an experienced tech investor or new to the game, this route offers a chance to be at the forefront of the AI revolution and grow your money in the process.