Disclaimer: This article has been written with the assistance of AI

There is no doubt that the rapid emergence of Artificial Intelligence (AI) has the power to transform many sectors of the economy and financial markets are no exception. Already, AI is being used as the building block for sophisticated tools and strategies that were once unimaginable. This will have a profound impact on how investors make decisions, manage portfolios, and navigate the complexities of the share market.

Advanced data analysis

One of the primary ways AI is influencing share investing is through advanced data analysis and predictive modelling. AI systems can process vast amounts of financial data at speeds impossible for humans, enabling investors to make more informed decisions. Machine learning algorithms can identify patterns, trends, and correlations in historical and real-time market data, providing valuable insights into potential investment opportunities and risks.

Fund managers who rely on predictions of future market movements can use AI to analyse market data and execute trades with remarkable precision. These algorithms can factor in multiple variables, including market sentiment, economic indicators, and even news sentiment analysis, to predict market movements. The ability to process and interpret such diverse data sources gives AI-powered systems a significant edge in identifying profitable investment opportunities and avoiding potential pitfalls.

 

Super-human speed

AI can also be used for algorithmic trading, where trades are placed automatically based on predefined rules. These algorithms can react to market changes in real-time, executing trades at speeds far beyond human capability. High-frequency trading (HFT) is an example of algorithmic trading that relies on AI to make split-second decisions and make thousands of trades within milliseconds.

Algorithmic trading not only increases the efficiency of share investing but also can also create problems. Flash crashes and market anomalies can occur due to the rapid pace of algorithmic trading, raising concerns about market stability and the need for regulatory frameworks to address these issues.

 

A new breed of advisers

Through AI, investors with small portfolios who might struggle to find an adviser can now access robo-advisers. These automated investment platforms use AI algorithms to create and manage diversified portfolios based on individual investors' risk tolerance, financial goals, and time horizons.

Robo-advisers offer a cost-effective and user-friendly alternative to traditional financial advisory services. By using AI, robo-advisers can continuously monitor and adjust portfolios in response to market changes, providing investors with a dynamic and adaptive investment strategy. This automated approach to portfolio management is particularly popular with younger investors who seek low-cost, tech-driven solutions.

 

Enhancing risk management

AI can also play a crucial role in risk management in share investing. Machine learning algorithms can assess the risk associated with specific investments and help investors build more resilient portfolios. Additionally, AI can be used to detect fraudulent activities, market manipulation, and insider trading. In this way, AI contributes to the integrity and security of financial markets.

 

The flipside

While the potential impact of AI on share investing is largely positive, it comes with its set of challenges and ethical considerations. The reliance on algorithmic trading raises concerns about market fairness, transparency, and the potential for unintended consequences. AI models are complex and there is a lack of transparency on the rationale behind the investment decisions they support. This lack of transparency can raise questions about accountability and trust in the financial system.

The future impact of AI on share investing is undeniable, and it will transform how investment decisions are made and executed. AI empowers investors with advanced tools to navigate the complex and dynamic world of financial markets, however it does need to be used with caution. Regulatory oversight will be needed to ensure investors can reap the benefits of AI while mitigating potential risks, ensuring that investment markets operate fairly and sustainably.

 

Written by: Liz Koh

Liz Koh is a money expert who specialises in retirement planning. The advice given here is general and does not constitute specific advice to any person.