How to Invest in Artificial Intelligence

Artificial intelligence (AI) is rapidly transforming industries worldwide, reshaping how businesses operate and interact with their customers. AI’s capacity to automate complex tasks, derive insights from vast datasets, and foster innovation positions it as a significant area for capital allocation.

Identifying AI Investment Opportunities

The artificial intelligence ecosystem presents a diverse range of investment opportunities across several distinct segments. Understanding these categories can help an investor navigate the landscape and pinpoint areas aligned with their interests.

AI infrastructure providers

AI infrastructure providers supply the essential hardware and foundational software enabling AI systems to function. This includes companies that design and manufacture specialized chips, such as graphics processing units (GPUs) and tensor processing units (TPUs). Cloud computing platforms also offer scalable resources and pre-built AI tools, allowing businesses to train and deploy AI models without extensive on-premise infrastructure. Demand for these providers is growing as more companies adopt AI solutions.

AI application developers

AI application developers create end-user applications powered by AI across numerous industries. These applications span sectors like healthcare, where AI assists in diagnostics, or finance, improving fraud detection and investment strategies. AI-driven applications also enhance productivity in manufacturing, automotive, and entertainment. These companies often focus on specific use cases, integrating AI to solve real-world problems.

Data and analytics companies

Data and analytics companies specialize in collecting, processing, and providing the vast datasets necessary for AI model training and operation. They offer tools and platforms that enable organizations to manage and analyze data, transforming raw information into actionable insights for AI applications. The quality and accessibility of data directly influence the effectiveness of AI systems.

Robotics and automation

In robotics and automation, AI is integrated into physical systems for intelligent machinery and automated processes. This includes companies developing collaborative robots (cobots) that work alongside human operators, or autonomous systems used in logistics and manufacturing. AI enhances robotic capabilities by enabling them to perceive environments, plan actions, and make decisions in real-time. This synergy is transforming industrial automation and creating new possibilities.

Cross-industry AI integrators

Cross-industry AI integrators apply AI solutions to improve processes in traditional industries. These companies leverage AI to enhance existing operations, optimize supply chains, or improve customer service across a broad spectrum of businesses. AI can be a horizontal technology, adding value and driving efficiency improvements across the economy.

Investment Vehicles for AI

Individual investors have several financial instruments available to gain exposure to the artificial intelligence sector, each offering different levels of diversification and management. Understanding the mechanics of these investment vehicles is essential for constructing a portfolio aligned with personal financial objectives. Each approach allows an investor to participate in the growth of AI, but with varying degrees of direct involvement and risk concentration.

Individual stocks

Investing in individual stocks of publicly traded companies allows investors to select specific companies they believe will outperform. Selecting individual stocks requires thorough due diligence, including reviewing a company’s Securities and Exchange Commission (SEC) filings, such as annual reports (Form 10-K) and quarterly reports (Form 10-Q). While individual stock picking offers the potential for higher returns, it also carries higher concentration risk compared to diversified options.

Exchange-Traded Funds (ETFs)

Exchange-Traded Funds (ETFs) provide a diversified way to invest in AI by pooling money from multiple investors to buy a basket of AI-related companies. ETFs typically track an index composed of companies involved in various aspects of AI. This diversification mitigates risk, as the fund’s value is tied to the collective performance of many underlying holdings. ETFs trade like individual stocks on exchanges throughout the day, offering liquidity, and generally have lower expense ratios compared to actively managed funds. Investors receive a proportionate share of dividends and capital gains distributions, which are subject to taxation.

Mutual funds

Mutual funds offer another avenue for AI investment, often through actively managed funds specializing in technology or AI. Unlike ETFs, mutual funds are typically priced once per day at their net asset value (NAV) and are not traded throughout the day. Actively managed mutual funds employ portfolio managers who make investment decisions to achieve the fund’s objectives. This active management comes with potentially higher expense ratios. Like ETFs, mutual funds distribute dividends and capital gains to shareholders.

Evaluating AI Investment Opportunities

Effectively evaluating artificial intelligence investment opportunities requires a systematic analytical process. Investors must assess specific criteria to determine the viability and potential of individual companies or funds. This rigorous assessment helps in making informed decisions and building a resilient investment portfolio.

Business models

Understanding the business models of AI companies involves examining how the company creates value, its target market, and its competitive advantages, such as proprietary technology or network effects. A robust business model demonstrates a clear path to profitability and consistent growth. Investors should analyze the company’s revenue streams and cost structure for operational efficiency.

Innovation and technology

Assessing innovation and technology is crucial. Investors should look for indicators of strong research and development (R&D) capabilities, patented technologies, and a track record of introducing novel solutions. Evaluating a company’s innovation pipeline and its ability to adapt to technological shifts can provide insights into its future competitiveness. This involves examining whether the company’s technology offers a significant advantage or addresses a unique market need.

Financial health indicators

Analyzing financial health indicators provides a quantitative view of a company’s performance. Key metrics include revenue growth, profitability (such as net income and operating income), and the strength of its balance sheet. Reviewing cash flow statements offers insight into how a company generates and uses cash. These financial statements, typically found in SEC filings, provide a comprehensive picture of a company’s economic standing.

Management team

Evaluating the management team is important. Investors should consider the team’s background, past achievements, and ability to execute strategic plans. A strong management team is capable of navigating market challenges, fostering innovation, and driving sustained growth.

Market position and competition

Understanding a company’s market position and competition within its specific AI niche involves analyzing market share, barriers to entry, and the intensity of rivalry from other AI players. A strong market position and defensible competitive moat are key for long-term success. Investors should also consider the broader industry trends and how they might impact the company’s future growth.

Diversification

Diversification within AI investments is important to mitigate concentration risk. Spreading investments across different AI sub-sectors, such as infrastructure, applications, and robotics, or across multiple companies within a segment, can reduce the impact of underperformance in any single area. While not a guarantee against losses, diversification can help smooth out portfolio returns over time.

Practical Steps for AI Investors

The next phase involves the practical steps of executing and managing AI investments. This process typically begins with establishing the necessary financial accounts and then proceeds through the mechanics of placing trades and monitoring performance.

Opening a brokerage account

The initial step is opening a brokerage account to purchase stocks, ETFs, and mutual funds. Investors can choose between various online brokerage firms based on commission fees, available products, and user-friendly platforms. The application process generally requires personal information. Investors also decide on the account type, such as a taxable brokerage account or a tax-advantaged retirement account like an Individual Retirement Account (IRA) or Roth IRA, which offer different tax benefits and withdrawal rules.

Funding the account

Once the brokerage account is established, it needs to be funded with capital for investment. Common methods include electronic funds transfers (ACH transfers) directly from a bank account, wire transfers, or mailing a physical check. ACH transfers are typically convenient and may take one to five business days for funds to become available for trading. Understanding the funding process ensures that capital is ready when investment opportunities arise.

Placing orders

Placing an order to buy individual stocks, ETFs, or mutual funds involves selecting an order type through the brokerage platform. A market order instructs the broker to execute the trade immediately at the best available current price. While it guarantees execution, the exact price might fluctuate, especially in volatile markets. Alternatively, a limit order allows investors to specify a maximum price they are willing to pay for a buy order or a minimum price for a sell order. This provides more control over the execution price but does not guarantee the order will be filled if the market price does not meet the specified limit.

Monitoring investments

Monitoring investments is an ongoing process that involves regularly tracking portfolio performance and reviewing investment statements. Brokerage platforms provide tools and dashboards to view current holdings, their market value, and performance against initial purchase prices. Investors receive monthly or quarterly statements. Regular monitoring helps investors stay informed about their portfolio’s alignment with financial goals.

Rebalancing and adjusting

Periodically rebalancing and adjusting investments is an important practice to maintain a desired asset allocation and risk profile. This may involve selling some investments that have grown significantly to reduce their proportion in the portfolio and using the proceeds to buy more of other investments that may have lagged. Rebalancing can be done on a calendar basis, such as annually or semi-annually, or when an asset class deviates significantly from its target allocation. This disciplined approach helps ensure the portfolio remains aligned with the investor’s long-term strategy and risk tolerance.