How to Invest in AI stocks for Beginners?

Learn how to invest in AI stocks for beginners with tips on top-performing companies, ETFs, risks, and strategies for long-term growth.

Artificial Intelligence (AI) has quickly become one of the most transformative technologies in the modern world. From healthcare to finance, AI is driving innovation, and investors are increasingly eager to gain exposure to this fast-growing sector. If you're a beginner interested in AI stocks, this guide will help you navigate the landscape and make informed decisions.

What Are AI Stocks?

AI stocks represent companies that either develop AI technologies or benefit significantly from the use of AI. These companies fall into two broad categories:

  1. Direct AI Developers: These are companies that actively develop AI technologies, such as NVIDIA, which designs GPUs for AI models, and SoundHound AI, which creates voice-based AI systems.
  2. AI Beneficiaries: These companies do not develop AI technologies themselves but use AI to improve their products or services. For example, Amazon uses AI for its cloud computing services, and Tesla incorporates AI into its self-driving car technologies.

The Best-Performing AI Stocks of this year

The following are some of the top-performing AI stocks over the past year. These companies have demonstrated strong growth in both revenue and stock performance:

  1. NVIDIA (NVDA): Up 190.90% in the last year, NVIDIA is a leader in designing GPUs used in AI, machine learning, and data center applications.
  2. SoundHound AI (SOUN): With a 174.07% gain, SoundHound specializes in voice-based AI solutions for industries like automotive and hospitality.
  3. Procept BioRobotics (PRCT): A healthcare AI company focused on medical robotics, particularly for urological procedures, with a 146.59% increase.
  4. AeroVironment (AVAV): This company, which designs unmanned aircraft and tactical missile systems, saw a 90.53% growth.

How to Invest in AI Stocks

  1. Open a Brokerage Account: The first step to investing in AI stocks is to open a brokerage account. There are many platforms available, each offering different features, fees, and tools for beginners.
  2. Choose Between Individual Stocks and ETFs:
  3. Individual Stocks: Investing directly in companies like NVIDIA, Microsoft, or Amazon can offer high returns but comes with higher risk. You'll need to do thorough research on each company’s performance and future prospects.
  4. AI-focused ETFs: Exchange-traded funds (ETFs) provide a more diversified approach by pooling together multiple AI-related companies. For example, the Indxx Global Robotics & AI Thematic Index tracks companies involved in AI development, while the Defiance Machine Learning & Quantum Computing ETF focuses on next-gen technologies.
  5. Consider Dollar-Cost Averaging: AI stocks can be volatile, and their prices might fluctuate significantly. By investing a fixed amount of money at regular intervals, you can mitigate the risk of buying at high prices and benefit from long-term gains.

Risks and Opportunities in AI Stocks

Pros:

  1. High Growth Potential: AI is revolutionizing multiple sectors, and companies involved in this space can see significant gains over time.
  2. Diverse Investment Options: With AI touching various industries, you can invest in sectors like healthcare, manufacturing, and finance through AI stocks.

Cons:

  1. Market Volatility: Many AI stocks, especially newer companies, can experience large price swings. For example, NVIDIA briefly became the world’s most valuable company in 2024 but quickly fell back in value due to market corrections.
  2. AI Hype: There’s growing concern that the market may be over-hyping some AI companies, leading to inflated stock prices that don't reflect actual business fundamentals. Be cautious of stocks that rise too fast without substantial earnings to back them up.

Are We in an AI Bubble?

While some experts believe that certain AI companies are overvalued due to investor excitement, many analysts argue that we are not in a full-blown AI bubble. According to Fidelity's Jon Guinness, the current valuation of AI companies is not as inflated as previous technology bubbles, like the dot-com bubble in 2000. However, it's essential to remain cautious, as AI stocks could experience corrections in the short term.

Should You Invest in AI Stocks?

Investing in AI can be a rewarding addition to your portfolio, but it’s crucial to maintain a diversified approach. Limit the portion of your portfolio allocated to individual stocks or narrowly focused ETFs to around 10% to mitigate risk. For long-term investors, AI stocks offer significant potential, but only if you can handle short-term volatility.

Final Thoughts

AI stocks present exciting opportunities for investors, especially those with a long-term outlook. By starting with a solid brokerage account, choosing between individual stocks and ETFs, and staying informed about market trends, you can build a smart and balanced AI investment strategy. Always remember to diversify your investments and be prepared for the ups and downs that come with emerging technologies like AI.

Disclaimer: The information provided in this article is for educational purposes only and should not be considered financial or investment advice.