As AI takes over most day-to-day tasks in our daily lives, it is important to note its it’s effect on the Indian capital markets. Charted Accountants and Investment specialists have been the major sources of Investment Advisory. However, things are about to change.
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What is Artificial Intelligence or AI?
Artificial Intelligence is a self-explanatory term which is a modern-day technology through which you can execute tasks through the decision-making ability of a computer program. Artificial Intelligence is one of the most talked about topics these days. The enormous capabilities of artificial intelligence have led to its growth in a short period.
Integration of AI in the investment advisory sector presents a time-efficient solution to the complicated process of analysing different financial markers which does require a lot of time as well as effort.
Follow through this article as we discuss the applications and after-effects of AI-based investment advisory in this article.
Applications of AI in Investment Advisory
Technical and fundamental analysis is the basis of any investment. Analysis of past performance and factors determining future price movements is essential while investing in the Indian markets.
AI has a ton of practical implementations in the investment advisory sector. AI provides a number of offerings to assist you in your financial journey through technical and fundamental analysis along with stock trading using algorithms, as discussed in the next section.
AI in Technical Analysis
Technical Analysis is the most crucial factor in making investments. Analysis of past trends to predict the future determines the best possible outcome, as patterns and prices tend to repeat.
- Automated Technical Analysis: The AI-based trading platform has an edge over conventional technical analysis software. It provides advanced features like automated trendline analysis, automated support and resistance levels based on the study of previous data through its machine-learning capabilities. This eases the process of short-term investing for beginners. AI identifies patterns and trends in charts and numerical data more efficiently than manual efforts, and this improves the accuracy of data analysis.
- Market Sentiment Analysis: AI-based software figures out the common market sentiment by scanning past data of shares being sold and bought from the stock exchange. This helps you invest or trade according to the real-time market condition so you do not trade opposite to the flow.
AI in Fundamental Analysis
Fundamental analysis of the backbone of long-term investments in a commodity or a particular company’s stock. It included a detailed analysis of different metrics determining a company’s long-term profitability and overall financial health.
It includes analysis of metrics like debt-to-equity ratio, dividend pay-out ratio, profit margins, overall revenue, price-to-earnings ratio and many others to determine if a company is suitable for investing in the long term.
AI integration can simplify this process as an algorithm developed can be used multiple times for different purposes.
AI in Trading of Securities
Trading of stocks, futures, options and commodities requires specific strategies. These strategies include technical indicators like the Relative Strength Index and Moving Averages, which are required to be monitored closely while you enter or exit a trade to ensure favourable outcomes.
- Personalised Experience: AI integration with trading platforms makes experience with trading platforms smoother as the algorithms in the back end monitor those parameters with much higher accuracy, thereby simplifying the process.
- AI also assists in developing an ideal portfolio according to an individual’s needs and risk appetite. This provides a personalised experience for different investing needs through investing suggestions.
- Testing of Strategies: AI-assisted trading also offers a mechanism for testing trading strategies.
- Backtesting a strategy signifies a method of verifying a specific strategy developed for trading securities to check if it works the desired way and generates profits and for various other factors through analysing its historical data.
- This feature plays a vital role in applying new strategies in the trading of securities.
Algorithm Trading or Algo Trading
Being in the talks, Algorithm trading is a process of spontaneous transactions of securities between stock exchanges or transacting securities between extremely minor price fluctuations.
These are transactions executed by a piece of code involving the use of artificial intelligence. Some upsides of Algo Trading are discussed as follows:
- Execution Time: Using AI, an individual can also develop advanced strategies for automated decision-making and market sentiment analysis. AI-powered high-frequency trading systems can execute trades at an extremely high speed and generate profit from a slight price fluctuation.
- Saves Effort: Machine learning and artificial intelligence make data analysis easier and save a lot of effort. Data analysed thus provides Information based on past trends that are likely to be repeated in the future as well.
- One-Time Investment: Algo Trading is executed through computer programs. One can argue that developing those complex programs is time-consuming and exhausting. However, once developed, these can be used for an extended period of time, saving costs over time.
Long Term Effects of AI in Investment Advisory
AI does provide a plethora of opportunities to maximise returns while investing in the markets. Managing risks in the capital markets through controlling losses and making the whole process time-efficient by helping reduce human effort are some outcomes of implementing AI in investment advisory which are discussed as follows.
Risk Management
Managing risk is fundamental to investing in capital markets. AI- enabled software helps you create trading strategies, through which you can determine your stop-loss levels and analyse your risk-to- reward ratio for a particular trade.
This helps you limit your losses and maximise every trading opportunity. The volatility of markets can cause your investments to not perform as per expectation. Stop losses are risk management tools which limit your losses in such cases.
Through its integration with AI, it will help save your investments when the market does not act as per research.
Time Efficiency
As per conventional methods, reading through a company’s data about their financials consumes a large amount of time.
Integrating AI enhances the efficiency of the process as the time required to read through data is greatly reduced.
Their ability to analyse tons of price action data of various securities in the back end makes the whole process a lot simpler than human execution.
Beginner Friendly
Investing in markets is a complicated process for beginners. Through AI, the
process of starting investing can be simplified. Trading and analysis tools can help ease the process for individuals with limited knowledge, thus providing them with market exposure without the need for complexity and extensive knowledge.
This promotes opportunities as well as adds to the volume of traded shares on the stock exchanges, contributing to the national economy.
Bottomline
However, AI being not fully developed into an investment advisory service, cannot be fully depended upon except for assistance.
AI, being relatively new, can lead to potential losses if one fully depends on AI-based advisory. Human expertise based on years of experience, research and execution has an edge as AI does not produce 100% accurate results.
Thus, AI-based investment advisory can not completely take over the Indian capital markets. Found it useful? Subscribe to the LLA Newsletter Future and AI which reaches 100k+ AI enthusiasts every week for such insightful information and level up your knowledge!
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