Artificial intelligence and investing have one precise thing in common – they are all about numbers.
Therefore, it is self-evident that investing and trading will benefit from the rise of AI. But will it be a game changer for higher returns and what can we expect in the coming years?
Fundamental analysis is a time intensive task for investors. For example, manual research of key financial figures like market cap, earnings per share, revenue, or profit estimates can easily cost hours or even days of work.
In addition, comparisons against competitors in the same industry and sector, cross checking of SEC fillings, and supplementing technical analysis make it even more complex.
Artificial intelligence algorithms do in seconds what investors carefully do in days or weeks. Computing power is far beyond any expectations of 10 years ago.
Quant investment procedures and high-frequency trading already dominate Wall Street. Hedge funds are specialised in trading shares of Apple, Netflix, or Tesla to make a profit of a cent or less per share.
Combined with the immense trading frequency and high speed trading executions, even those minimal profits per share generate millions of dollars in profit for institutions.
Artificial intelligence makes the difference
AI in the investment sector is about the same things that stock market analysts, investors and traders previously did manually by reading the latest news and analysing market trends to identify entry and exit points.
These days, institutions hire armies of mathematicians to decode the market, write API protocols, and use AI powered backtesting software to determine the best trading and investment strategies in each market cycle.
Computer algorithms only know 0 and 1, while people have a gut feeling, are influenced by various surrounding occurrences and may make different investments decisions even if the fundamentals are the same.
But the computer is not only more precise, but it is also way faster. That’s not only true for analysis. It is also the case for order routing and trade executions on exchanges like the New York Stock Exchange and Nasdaq.
Hedge funds and other institutional investors pay enormous sums to have their servers and data centers as close to the physical location of the stock exchange as possible.
Milliseconds make a whole difference for trade executions and profitability. Everything from hardware to software, skills and infrastructure needs to be perfect for the best possible results. So even less obvious things quickly become the main point of interest.
Cutting edge cables, for example, push HTF-traders closer to light speed. The benefits of hollow core fiber – the latest generation of fiber optic cables improve the speed by billionths of a second and not more.
But precisely, this difference in speed decides about the make or break when trading stock on Wall Street.
High tech earnings announcement analysis
A company listing on the New York Stock Exchange and Nasdaq comes along with various regulative requirements defined by the SEC. For example, companies are required to publish earnings every three months.
Those reports are typically reported outside regular trading hours. Companies like Apple., Amazon and Netflix report after market close, as do Pfizer and Exxon Mobil Corporation.
This way, unforeseen irrational moves in reaction to announced company figures are avoided.
Decades ago, analysts began reading those SEC filings one page by the other to better understand the company’s financial situation and interpret the company’s valuation relative to competitors and price per share.
Today, AI is used in the financial world to read and analyse company announcements and SEC fillings. The majority of data is comparable, like the balance sheet or various financial KPIs. But AI does not only search for company finances within those fillings.
The computer programs also scan for important keywords that allow conclusions about the current situation, market perspective, and company outlook.
Robo advisors for retail investors
Retail investors often use robo advisors to manage a portfolio.
Artificial Intelligence algorithms often supplement robo advisors and help re-balancing portfolios automatically. This can be for a portfolio with diversified stocks or assets like exchange traded funds.
The main benefits for investors are the low costs of using robo advisors and the comfort of getting access to a robo managed portfolio with minimal self-managed trade execution activity.
Saving time and money are great arguments for using robo advisors, while there is no proof yet that AI for retail investors works better during more intense market corrections.
Since March 2009, the stock market knows only one direction – to the upside. The SPDR S&P ETF Trust had its lows at $6,7.10 in March 2009 and marked an all-time high at $479.98 in January 2022.
The market correction between January 2020 and March 2020 was too short to finally conclude how well AI helped investors since the market rebounded from its lows to new highs within five months.
Only time can tell if automated trading algorithms are remarkably beneficial for the retail investor.
Digital disruption across multiple finance sectors
Digital disruption changes the way we live, how we work and revolutionises sectors like the finance industry. As a result, more and more companies identify ways of using state-of-the-art technologies to grow to new business leaders.
For young investors, it is a matter of course that companies can keep pace with the latest technological developments, be it mobile banking- electronic banking or real-time trading.
One of the latest well known FinTech trends is blockchain technologies and associated cryptocurrencies like Bitcoin, Ethereum and Litecoin. No other area in the financial sector is currently as influential as crypto.
More and more platforms, services, and providers accept cryptocurrencies as payment methods, implement relevant APIs, and develop products related to the technology, like non-fungible tokens.
Companies like MicroStrategy., Tesla and Square officially hold over 175,000 Bitcoin, currently worth more than $7 billion.
The AI trend is here to stay. It will continue to influence our lives. Artificial intelligence will further help companies increase their profits, reduce risks, and come up with even more valuable solutions for investors.