Artificial intelligence (AI) is no longer a futuristic concept—it's a transformative force reshaping industries and everyday life. Before investing in AI, it’s useful to understand what artificial intelligence is; AI technology infuses computers and tech products with human-like intelligence and problem-solving abilities. From virtual assistants in our homes to autonomous vehicles on our roads, AI is quickly being added to many products and applications, dominating discussions of investments and questions about the future.
The AI landscape is complex and news of added capabilities at one firm reshuffles the pace of change at all of them. Choosing the best AI companies to invest in is a tricky endeavor. Just as investors half a generation ago had to separate the wheat from the chaff among web browser, smartphone, and app-based startups, so too are niche players and established tech giants now vying for AI market share and research capital.
In this article, we explore how to invest in AI and showcase the best AI stocks and funds.
Key Takeaways
- Investing in AI technology is not monolithic, with investment opportunities across diverse sectors and international AI companies. From startups to established firms, AI is a central feature in a range of companies. Investment opportunities in AI offer great potential, and great risk should companies with promise falter.
- Laws and regulations, including those involving copyright, could evolve and vary across geographies, affecting investments.
- As much as with any other theme, investing in this area requires ongoing education and engagement to understand the potential and limitations of AI-based products.
How to Invest in AI
Like past emerging technologies, such as railroads in the late 1800s or the personal computer in the 1980s, there are many ways to invest in AI. While some companies will have wild success, other early companies will fail.
The computer revolution is an apt analogy for AI investing and how to invest in AI. Computers set the stage for automating mundane and repeatable tasks, and now AI seeks to advance this concept by automating tasks that previously required human intelligence.
Investors can find some top AI stocks have one-year returns in the high double digits, with NVIDIA reporting 176% 12-month growth as of July 23, 2024.
Some people want to invest directly in companies that develop AI, while others might invest in those companies that stand to benefit the most from its wider adoption. Using the introduction and growth of the personal computer industry as an example, some investors successfully invested in computer manufacturers or hardware companies that made routers and switches. Others invested in software companies that produced computer programs, while others attempted to identify companies that would benefit most from the automation that computers offered.
Some of these investments were direct bets on computers and the actual technology, while others were more conservative, such as buying shares in already strong companies that stood to benefit from the growth of computer usage. The point is that there are various ways to invest in a new technology.
Sometimes, one firm takes and holds a market-leading position, but other times, an imitator can use the first company's technology better, making it more successful over time. Since it’s tough to pick the winning AI stocks in advance, owning several or selecting an AI ETF could minimize making a wrong move.
Invest in AI Stocks and ETFs
Leading Companies in AI
While these are among the top AI stocks, consider the business cycle and valuations before going all in. You might want to incorporate a dollar cost average into your AI stock picks as a hedge against a market drop.
- NVIDIA (NVDA): NVIDIA Corp. is at the forefront of the AI revolution thanks to its work in designing and developing graphics processing units (GPUs) and related software and data center networking solutions. Investors have noticed: As of July 23, 2024, its share price has risen 176% during the past 12 months and grown by more than 2,885% in the past five. These GPUs, originally created for the PC graphics and video gaming industries, have become the backbone of AI, machine learning, autonomous vehicles, robotics, augmented reality and virtual reality applications, and even cryptocurrency mining systems.
- Microsoft (MSFT): Microsoft is an example of a legacy tech company delivering AI investing promises. Microsoft has a partnership with OpenAI, the company behind ChatGPT. It has leveraged that partnership to embed AI in its Azure cloud services, and Microsoft 365 now has an add-on subscription for generative AI, called Copilot. Microsoft said in its April 2024 earnings call that 65% of the Fortune 500 was using its Azure OpenAI service, about the same percentage that it said was using Copilot.
- AeroVironment Inc. (AVAV): Government contracts with the U.S. Department of Defense and U.S. allies provide a degree of support for this narrowly focused AI stock. AeroVironment Inc. supplies unstaffed aircraft and tactical mission systems along with high-altitude pseudo-satellites. The AVAV systems provide security and surveillance without the necessity of a person or driver in the air.
- Amazon.com (AMZN): Amazon’s generative AI capabilities improve customer experience, improve employee productivity, broaden creativity and content creation, and maximize processes. Amazon uses AI in its Alexa system and also sells machine learning and AI services to business customers. Amazon’s cloud computing business, Amazon Web Services, provides an AI infrastructure that allows its customers to analyze data and incorporate AI into their existing systems. Amazon has also made its Amazon Q AI assistant generally available for software development and data analysis.
- Taiwan Semiconductor Manufacturing (TSM): Taiwan Semiconductor Manufacturing is the world’s largest chipmaker and a global player in chip manufacturing for artificial intelligence. As AI grows, the need for robust computing chips will grow with it. TSM is a mature company that continues to make chips for non-AI computer applications, so it may represent less risk than other pure plays on AI.
- Arista Networks Inc. (ANET): Launched in 2008, Arista bridges the gap between startup and legacy tech companies. Arista is a networking equipment company that sells ethernet switches and software to data centers. With the ethernet among the best options to power AI workloads, Arista is well-positioned to capitalize on its power to improve how we work, recreate, and learn.
- Adobe Inc. (ADBE): Global workers have depended upon Adobe products for content creation, document management, digital marketing, advertising software, and services for years. Among the older companies on our list of best AI companies to invest in, Adobe has infused most of its products and services with AI features, boosting its already impressive competitive advantage. Recent performance has lagged behind our other best AI firms, but the company could be a bargain now. According to Morningstar, the company is significantly undervalued and holds a four-star ranking.
Compare Some Top Brokers to Invest in AI Stocks
| Platform | Account Minimum | Fees |
|---|---|---|
| Merrill Edge | $0 | $0 per stock trade, options trades $0 per leg plus $0.65 per contract |
| E*TRADE | $0 | No commission for stock/ETF trades, options $0.50-$0.65 per contract, depending on trading volume. |
| Interactive Brokers | $0 | $0 commissions for equities/ETFs available on IBKR’s TWS Lite, or low costs scaled by volume for active traders who want access to advanced functionality such as order routing; $0.65 per contract for options on TWS Lite; that is also the base rate for TWS Pro users, with scaled rates based on volume; $0.85 per contract for futures |
Best AI ETFs
Investing in professionally managed ETFs or mutual funds that hold shares in AI companies allows you to leave it to a fund's professional managers to research and pick suitable AI companies. Through an ETF, you own a share of a portfolio of multiple AI stocks within a single investment.
- iShares Exponential Technologies ETF (XT): XT is a large capitalization fund that includes 186 U.S. and global stocks trying to disrupt the industry. With $3.4 billion in assets, XT hones in on the power of AI to automate, analyze, and create new ideas. The fund spans the tech, healthcare, industrial, and financial sectors.
- Defiance Machine Learning & Quantum Computing ETF (QTUM): This index AI fund brings artificial intelligence and machine learning to a range of industries. The fund replicates the BlueStar Quantum Computing and Machine Learning Index (BQTUM), which tracks 71 global stocks with multi-market capitalization. The Defiance Machine Learning & Quantum Computing ETF captures returns of the companies at the forefront of next-gen disruptive technology and machine learning.
- ROBO Global Robotics & Automation Index ETF (ROBO): This ETF invests in companies focused on robotics, automation, and AI, including growth and blend stocks of all market capitalizations.
Compare Some Top Brokers to Invest in AI ETFs
| Company | Account Minimum | Fees |
|---|---|---|
| Fidelity | $0 | $0 for stock/ETF trades, $0 plus $0.65/contract for options trades |
| Interactive Brokers | $0 | $0.00 commissions for equities/ETFs available on IBKR’s TWS Lite, or low costs scaled by volume for active traders who want access to advanced functionality such as order routing; $0.65 per contract for options on TWS Lite; that is also the base rate for TWS Pro users, with scaled rates based on volume; $0.85 per contract for futures |
| Charles Schwab | $0 | $0 for stock/ETF trades, $0.65 per contract for options |
How to Search for AI Investments
Buying individual AI stocks is more work for the investor. Given the multiple ways to invest in AI, the first step is to read about the industry to understand the various aspects of artificial intelligence. Within the AI universe, there are pure plays and more conservative plays, and you'll have to decide the type of exposure you want in this market sector. Once you have an idea of the parts of the AI market you want to invest in, you can perform traditional investment analyses—both fundamental and technical.
- Earnings forecasts: Earnings are a great way to judge a company's performance, and AI companies with consistent and growing earnings should be looked at favorably. Many AI companies will be viewed as growth stocks, so earnings growth will be an important criterion for many investors. Earnings releases tend to move AI stocks up or down sharply.
- Annual reports: These reports provide important details about the company's activities and future growth plans. The financial statements allow you to review the company's debt-to-equity and other accounting ratios, which are used to make financial decisions about stocks.
- Relative performance vs. the market: Relative performance is how an individual stock performs compared with an index or another stock. For newer AI companies, it's best to compare their relative performance with similar companies.
- Growth analysis: This deals with a company's growth over time. You'll examine earnings, market share, and other metrics to determine the company's strength and prospects.
- Analyst projections: Analyses and reports can be especially worthwhile if you're new to the AI space. This volatile market has constant and new technological developments, and company prospects change much more quickly than in more mature industries. Therefore, it's good to gain the perspective of professional researchers who understand the overall AI space and the prospects of individual stocks relative to competitors.
Frequently Asked Questions (FAQs)
Can Investors Make Money in AI?
AI is exploding, and the technology behind it appears poised to break out further and deliver on expectations for more widespread adoption across a wide range of businesses and real-world applications. Like any technology that requires massive capital investment, AI offers plenty of opportunities for investors to make money, but new technologies also involve risk.
You'll want to determine the best way to gain exposure without involving risk beyond your tolerance. Choices include more speculative direct AI investments in individual companies or ETFs and mutual funds that offer a portfolio of multiple companies in the AI space. You can also look to invest in companies that are positioned to increase their revenues as AI is more widely adopted across the economy.
How Can You Invest in AI Art?
Generative AI use for images is among its most popular applications. Users can type or speak of an image they want to create, and an AI program can produce an image that meets that description—most of the time. These AI programs use the user’s description with images available worldwide to generate the image for the user requesting the artwork.
People of all ages and backgrounds have utilized AI-generated artwork. Once you’ve created AI art, you can sell it and/or buy from others on AI art marketplaces. Art made with AI can be collected as giclee prints, digital downloads, NFTs, and other formats. It can be bought and sold on some crypto platforms and designated AI art websites. However, the profit and investment potential for AI art is still in its infancy and cannot be accurately ascertained.
How Can You Invest in AI Startups?
Startup companies are often created in new and promising fields, such as AI and machine learning. Often, these are companies that have been initially capitalized by venture capital investors, then taken public to capitalize on their initial investment and to raise more capital as the business increases its operations and begins offering its products to a wider customer base.
Many startup investments are only available to large accredited investors. Other websites enable the public to invest small amounts in promising new ventures. You’ll need to sift through the offerings to uncover the AI startup companies. While investing in startups can be risky, the rewards for investing in a successful startup company can be huge. Examples of successful startup companies include Apple, Amazon, and Microsoft.
Can You Invest Directly in AI?
Yes, you can directly invest in AI and machine learning by investing in individual stocks or in ETFs or mutual funds that focus on AI stocks. Conservative investors wondering which AI stocks to buy might consider established companies that are benefiting from AI processes, while aggressive investors can seek out investments in direct AI companies. For AI investing ideas, check out the best AI stocks. This list is updated monthly.
The Bottom Line
Investing in AI in 2024 offers compelling prospects for your portfolio. The technology continues to seep into the media, healthcare, automotive, finance, and other sectors.
However, you'll have to navigate challenges that could include potential legal and regulatory changes, supply shortages, and the broader political and ethical considerations concerning the widespread deployment of AI systems and the ecological effects of powering them.
Similar to investing in the new internet and computing industries decades ago, the winners and losers can change on a dime. Staying informed and selectively investing in companies prioritizing robust business models will be crucial for those looking to capitalize on the AI boom while mitigating risks.
