Artificial intelligence is advancing by leaps and bounds in many areas … and the equity markets are not excluded from its effects, of course. AI is starting to dominate finance at full speed where investors are always looking for any technological edge that can increase their profit margins and improve their returns. If you’re looking to invest in the stock market or stock trade professionally, you need to learn about the impact and the advantages of AI in the stock market. In this article, we’ll explore the uses of AI in the stock market and how investors taking advantage of the technology will experience a boost in performance.
Removing the Human Element
Humans have multiple cognitive biases and emotional reactions that make them make consistent predictable and unpredictable mistakes. The most stoic of men who have spent years studying the various cognitive biases of humans will still fall into the same patterns and make mistakes. These are just inherent to the human condition.
So, what can be done if humans will always make irrational decisions, which can be quite costly on the stock market? You guessed right: you can use AI to eliminate the human element almost entirely and make rational decisions on the stock market. The AI algorithms will use years of historic data, analyze financial statements of companies, and observe trends dispassionately and make decisions without any emotion. This makes for effective decision making that can outperform the best of investors.
Observing the Market Every Single Minute
Unless you’re a full-time day trader and that’s your only job, you can’t observe the market every single minute, and even then, you won’t be able to effectively analyze the financial statements of hundreds of companies, keep up with foreign stock exchanges, or read the quarterly reports of a large enough number of businesses. These hard limits constrain your knowledge and prevent you from making profit-maximizing decisions.
These same constraints don’t exist with artificial intelligence algorithms. They don’t need to rest, they can keep up with multiple markets at the same time, and they can scan financial statements in seconds, and they can make decisions with much more information than a human can.
Doing Complex Analysis in a Matter of Seconds
By using AI in finances and the stock market, you can do complex calculations that analyze years of historic data and minute changes in trends all in milliseconds. Computers are exceptionally good at calculations and AI algorithms make full use of this.
By doing complex analyses in a short amount of time, the algorithm can react quickly to the changes in the market and make decisions more effectively. This is why a lot of professional hedge funds use highly complex AI algorithms to invest, and in many of them, the algorithms are vastly more important than many of the day traders working there.