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Trading and Investing in Generative AI Mega-Trend

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Generative AI Investing Guide
Cristian Cochintu
Cristian Cochintu
23 November 2023

Generative AI has garnered attention and moved markets in 2023, earning comparisons to the internet and smartphone for its transformative potential. Learn how to invest in AI and capitalize on the future. hone for its transformative potential. Learn how to invest in AI and capitalize on the future. 

Artificial Intelligence (AI) is increasingly a part of the world around us, and it's drastically changing our lives. It offers a thrilling opportunity, and sometimes, it can be more than a little scary. And without a doubt, the big development in AI making waves right now is generative AI.

As an investor, you can ride the wave of generative AI. Companies that leverage this technology have a competitive edge, and investing in them could yield significant returns as the market develops.  

How to Trade or Invest in Generative AI – Quick Guide

  • Create a brokerage account: Trading lets you speculate on rising or falling prices with leveraged products, investing lets you take portion of ownership in publicly traded companies listed on the world's major stock exchanges.  
  • Research companies: Explore information about what the company does, available financials, and details of future plans such as partnerships and product roadmaps.  
  • Take your position: Select investments that provide exposure to the Generative AI sector based on clear goals and your risk appetite.  

    

Or, if you want to get a greater understanding of this fast-growing artificial intelligence sector before you take a position, continue reading our full guide to Generative AI investing.  

What is Generative AI?

Generative AI is Artificial Intelligence that can create new, unique content by learning patterns and structures from existing data. Any time an AI technology is generating something on its own, it can be referred to as “generative AI.”  

Generative AI was first mostly used for text and image creation, but as technology has advanced, an abundance of new applications has become possible. To name a few, these are:

  • Images: Many generative AI tools can take a natural language prompt and use it to generate a picture. 
  • Text: ChatGPT is probably responsible for kicking off the intense hype surrounding generative AI now. They can be used to write anything from essays and articles to plays, poems, and novels.
  • Coding: Tools like Microsoft’s GitHub Copilot and Amazon’s CodeWhisperer, as well as ChatGPT make it easy for anyone to generate computer code with very little technical knowledge.
  • Audio: Generative AI tools can create human-like voices (voice synthesis), allowing computers to speak words that have never been uttered by a human, as well as music and sound effects.
  • Video: While not yet as advanced as text or image generation, tools are beginning to emerge that allow us to create and edit video simply by describing what we want to see.
  • Data augmentation: Generative AI facilitates the creation of fully synthetic data sets that may be used to train other AI models that adhere to real-world regulations without imposing duties on data security and privacy on those who keep and utilize it.
  • Virtual environments: Consider explorable and interactive virtual reality (VR) environments, interactive video game worlds, or the much-hyped metaverse. These are extremely complicated to design, but generative AI can speed up the process considerably.

Why Invest in Generative AI?

A few years ago, it would have been hard to conceive that technology available to the public could compose term papers for students, pass the bar exam, or produce visuals and videos based on text-based prompts. However, the instances of what generative AI can currently do are amazing. This new technology has taken off at an unparalleled rate of adoption. Launched in November 2022, ChatGPT became the fastest-growing application of all time, reaching 100 million users in just two months, according to Bloomberg.

Even while these are amazing developments, wise investors understand that for a technology to be a profitable investment, it must also have a positive financial impact. Generative AI is both business- and consumer-facing, underscoring an attractive long-term investment thesis. Roundhill predict that the related software market for Generative AI will balloon to $121 billion in the years ahead. Goldman Sachs estimates that over the course of the next 10 years, the overall economic output driven by Generative AI will hit trillions of dollars.

With CAPEX.com, you’ll be able to trade or invest in Generative AI stocks or ETFs:  

Stocks give you exposure to the market performance of different companies that are directly involved in the artificial intelligence sector with a focus on Generative AI.ETFs are a basket of securities – usually the shares of multiple companies and certain indices – that will give you diversified exposure to the artificial intelligence sector.

Invest in Generative AI Stocks

We have selected stocks that are involved in the generative AI space through either their own software or chatbots or even other technology that is vitally supporting generative AI applications in different companies.  We shortlisted the stocks by using hedge fund data and their upside potential, mentioned on Tip Ranks as of February 2024.

Microsoft (NASDAQ: MSFT)

Microsoft, a significant player in technology, has pledged to invest up to an additional $10 billion in the chatbot maker in the coming years, following its original investment of at least US$3 billion in OpenAI a few years ago.

Bing AI, a chatbot developed by Microsoft, is built on OpenAI technology. Users can now immediately question the Bing chatbot by using the search bar of the operating system thanks to a Windows 11 upgrade that was released earlier this year. Beginning in early August, users of Chrome on Windows and Safari on MacOS can now access Bing AI, which is also available in certain browsers other than Microsoft Edge. Microsoft also intends to release the product for mobile and desktop third-party browsers.

Generative AI Stocks MSFT
MSFT Chart - CAPEX WebTrader

   

Alphabet (NASDAQ: GOOGL)

Launched this year, Alphabet's AI chatbot Bard is positioned as a competitor to ChatGPT and Bing. The two-year-old chatbot was developed using Google's Language Model for Dialogue Applications, a division of Alphabet, and went into testing at the beginning of February. The business has included Bard in its Google Search tool, just like Bing.

During the launch, Alphabet's attempt to enter the AI chatbot market encountered a setback when Bard made headlines for answering a question regarding recent findings from the James Webb Space Telescope incorrectly. Although Forbes reports that Alphabet's market value fell by US$100 billion in a single day, the business recovered quickly, and as staff writer Jonathan Ponciano of Forbes noted, there is still a lot of optimism that Google is well positioned to capture a significant part of the Generative AI market.

Generative AI Stocks GOOGL
GOOGL Chart - CAPEX WebTrader

   

Amazon (NASDAQ: AMZN)

Amazon Web Services (AWS), a cloud computing platform and subsidiary of Amazon, was born out of Amazon's evolution from an online retailer to one of the biggest technology firms in the world. Computing, storage, databases, networking, analytics, machine learning, and artificial intelligence are among the many services offered by AWS.

Across four verticals—AI services, AI platforms, AI frameworks, and AI infrastructure—AWS offers a variety of AI business solutions. Since the technology underpins the all-too-familiar Alexa conversational interactions, generative AI is nothing new to Amazon. AWS unveiled Bedrock, a service in April that improves applications with generative AI features like producing content for emails, papers, and blog posts, or converting text into graphics.

Generative AI Stocks AMZN
AMZN Chart - CAPEX WebTrader

   

NVIDIA (NASDAQ: NVDA)

When it comes to graphics processing unit (GPU) technology for laptops, workstations, mobile devices, notebooks, PCs, and other devices, NVIDIA is a pioneer and a global leader. AI, mobile devices, automotive electronics, and gaming are the main areas of its business strategy. The company also provides scientific researchers worldwide with supercomputing processing capabilities.

With the help of NVIDIA, Meta Platforms was able to develop its own AI supercomputer, the second phase of which was finished in May. Said to employ 2,000 NVIDIA DGX A100 systems, each housing eight of its A100 GPUs, the Research SuperCluster is said to employ 16,000 GPUs in total. Additionally, NVIDIA and Dell Technologies (DELL) collaborate on AI business applications, including speech recognition, language-based services, and cybersecurity.

Generative AI Stocks NVDA
NVDA Chart - CAPEX WebTrader

   

Cisco Systems (NASDAQ: CSCO)

Leading global provider of digital communications, Cisco Systems is a pioneer in communications networks and IT. The company has solid ties to Azure, AWS, and Google Cloud and offers a wide range of multi-cloud solutions and applications. With an emphasis on cybersecurity, Cisco offers a broad range of computing solutions for businesses through its AI and machine learning products.  

Executive vice president and general manager of security and collaboration at Cisco Systems, Jeetu Patel, discussed the possible security risks faced by generative AI technologies like ChatGPT earlier in 2023. Additionally, Cisco has introduced the AI Policy Assistant and other new generative AI products for IT professionals to the market.

Generative AI Stocks CSCO
CSCO Chart - CAPEX WebTrader

   

Other Generative AI stocks to consider for 2024 and beyond are Intel (NASDAQ: INTC), IBM (NYSE: IBM), Micron Technology (NASDAQ: MU), Marvell Technology Group (NASDAQ: MRVL), Juniper Networks (NYSE: JNPR) Adobe Inc. (NASDAQ: ADBE), Intuit Inc. (NASDAQ: INTU), Baidu, Inc. (NASDAQ: BIDU), or Alibaba Group Holding Limited (NYSE: BABA).

Invest in Generative AI ETFs

While OpenAI, the company behind high-profile AI products like ChatGPT and Dall-E, is private, there are plenty of ways to invest in publicly traded companies with generative AI offerings. Some Exhange-Traded-Funds (ETFs) cover many of these companies by investing across several different areas that are relevant to generative AI -- software, cloud infrastructure, semiconductors, network infrastructure, and services.  

The Roundhill Generative AI & Technology ETF (NYSE: CHAT)

The ETF currently holds 32 positions, and its top 10 positions account for 56.9% of holdings. You probably won’t be surprised to find out that CHAT’s top holding is Nvidia (NASDAQ: NVDA), the semiconductor giant whose chips power many generative AI solutions today. Nvidia is a fairly large position, accounting for 7.9% of the fund. Microsoft (NASDAQ: MSFT) isn’t far behind, with a 7.6% weighting.

Microsoft owns a stake in OpenAI, its Bing search engine now incorporates ChatGPT, and it is working with Nvidia to build an AI supercomputer. The third largest holding, Alphabet (NASDAQ: GOOG), has plenty of irons in the AI fire and recently released its answer to ChatGPT, Bard, to the public.

WisdomTree Artificial Intelligence & Innovation Fund (BATS: WTAI)

Like CHAT, the WisdomTree Artificial Intelligence & Innovation Fund is a relative newcomer to the world of ETFs, launching in December 2021. It’s larger than CHAT, with nearly $100 million in AUM, and it has a comparatively lower expense ratio of 0.45%.  

While WTAI isn’t exclusively focused on generative AI like CHAT, it takes a comprehensive approach toward investing across the space, including AI software, semiconductors, hardware (which includes things like drones, autonomous vehicles, and industrial automation), and innovation, which WisdomTree describes as any application of AI technology disrupting existing industries.

Defiance Machine Learning & Quantum Computing ETF (NYSE: QTUM)

QTUM provides exposure to companies at the forefront of machine learning, quantum computing, cloud computing, and other transformative computing technologies. The underlying index of this quantum computing and machine learning ETF is called the BlueStar Quantum Computing and Machine Learning Index (BQTUM). It tracks approximately 71 globally listed stocks across all market capitalizations.

The BlueStar Quantum Computing and Machine Learning Index is a rules-based index comprised of equity securities of leading global companies engaged in the research & development or commercialization of systems and materials used in quantum computing: advanced traditional computing hardware, high-powered computing data connectivity solutions, and cooling systems, and companies that specialize in the perception, collection, and management of heterogeneous big data used in machine learning.

How to Search for Generative AI Investments?

Buying individual Generative AI stocks represents more work for individuals. The first step is to read and understand the various aspects of the industry, as there are multiple ways to invest in Generative AI. As outlined earlier, there are pure plays and more conservative plays within the Generative AI universe, and investors will have to decide the type of exposure they want to this market sector. Once the investor has an idea of the overall parts of the Generative AI market they want to invest in, they should utilize traditional investment analysis—both fundamental and technical.  

The Generative AI Technology Investment Stack

Investing in generative AI is a very active endeavor since one must be agile and aware of the opportunities at each given point in the process. An examination of the technology "stack" reveals available and future options, all of which are subject to change as generative AI develops, becomes more intelligent, and becomes sharper.  

 What it isWhere to invest
Infrastructure & CloudThe hardware and computing resources needed to enable AI function and growth. Includes GPUs, storage, and memory.Cloud service providers building AI-enabled data centers; semiconductors and makers of chip manufacturing equipment are critical inputs.
AI models (proprietary & open source)The software required to train AI to “think” and do.Companies involved in the research and development of AI learning and language models.
Data (private & public/free)The information upon which AI models will “think,” process and generate content.Suppliers of information and analytics, and those involved in data staging. AI makes private data more useful and, therefore, more valuable.
Tools & applicationsThe tools to create apps and the actual instruments and apps powered by generative AI.Companies that build apps and the tools to create them. Existing apps will be enhanced; many start-ups likely to emerge.
 

 

The Generative AI Investment Analysis

Like the internet over the last 25 years, generative AI is seen to be improving and has the potential to revolutionize enterprises globally. However, we cannot approach the investing thesis in a static manner because Generative AI is novel, fascinating, and constantly changing. As generative AI progresses from peak expectations to enlightenment and productivity, fundamental-based stock pickers should constantly verify the investment case.

  • Earnings forecasts: A company's earnings are an excellent indicator of its performance, and AI businesses that consistently and rapidly raise their earnings will be seen favorably. Earnings growth will be a key factor for many investors, as many companies will be perceived as growth stocks. Generative AI stocks tend to move very sharply in one direction or the other after earnings announcements.  
  • Annual reports: Important narrative information about the company's operations is provided by annual reports, and investors can examine financial indicators like debt to equity and other accounting ratios in the financial statements to help them choose the best Generative AI stocks.  
  • Relative performance vs. the market: Examining a Generative AI stock's performance in relation to an AI or tech index like NASDAQ-100 or another AI stock is known as relative performance. It can be beneficial to compare the relative performance of similar companies when examining more recent AI startups.
  • Growth analysis: Examining a stock's performance in relation to an index or another Generative AI stock is known as relative performance. It can be beneficial to compare the relative performance of similar companies when examining more recent AI startups.  
  • Analyst projections: For investors who are unfamiliar with Generative AI, analysis projections and research papers may be especially useful. The market is highly unstable, with fresh technological advancements and firm prospects shifting far faster than those of equities in more established industries. Gaining insight from experts in the field who are knowledgeable about the Artificial Intelligence market as well as the prospects of specific Generative AI stocks in comparison to industry rivals is therefore beneficial.

Generative AI Essentials for Investors  

Regardless of whether there is a near-term hiccup, the long-term potential for AI looks bright. As the amount of data increases and the cost of processing it comes down over time, analysts expect Generative AI will continue to grow. Yet AI applications will ultimately meet with varying degrees of success, suggesting Generative AI could contribute to dispersion across individual companies and their stock prices.

Generative AI investments - Worthy of excitement

Universal application
Experts see Generative AI as having a significant and long-lasting impact, in contrast to past technological advancements that had brief notoriety before becoming unnoticed. Compared to earlier innovations with a more constrained scope, its usage is about to reach previously unheard-of levels of usage (e.g., 3D printing, augmented reality, metaverse). The primary differentiation is in the fact that Generative AI is a platform that possesses aspects of human intelligence, making it applicable to a wide range of sectors, businesses, and specialties.
Long-term potential
This is a multi-decade opportunity since Generative AI is growing and it will take time to realize its full potential. However, businesses are currently investing real money on Generative AI to fully realize its immense potential. The technology sector offers the most investment potential during the building period. Understanding where we are in the AI lifecycle and which parts of the technology "stack" can be useful is crucial.
Not a tech-only story
The potential applications of AI in the economy as a whole go beyond the effects and prospects in the technology sector. Call centers will probably be replaced, while in other cases, the applications could be more subtle and less revolutionary, like an AI-powered co-pilot added to an already-existing software package. AI presents both public and private investment options, with many of the early-stage potential may be better suited for private investments.

Generative AI investments - Warranting awareness

Great expectations 
Some AI-related stocks may be susceptible to disappointment due to high valuations in the early stages of the technological stack, even if the rate of growth slows down. Companies that produce essential chips (GPUs) have been able to earn an unusually large margin for a while due to a scarcity, but this creates a risk when supply catches up to demand and competition increases. Numerous tales of supply shortages that later resulted in supply gluts may be found throughout business history.
Build it and they will come?
In previous cycles, once the infrastructure to support new technologies was established, they weren't always used to their full potential. The global reach of AI may make this era distinct. Data is another essential component for AI to work for businesses and organizations. Although public data can be used to train AI models, proprietary data must be added to the data for the models to be useful for making business choices. Many organizations are hampered in this field by incomplete, disorganized, or compartmentalized data, which may hinder or slow the use of AI.
Capital chasing the unknown
Compared to the money generated by Generative AI, capital expenditures (CapEx) have increased. Whether businesses will follow through and employ the services to continue the spending wave is a crucial concern. Companies may have made some of the early investments out of FOMO, as they don't want to be left behind if they pass up a profitable invention. However, companies will need to determine whether AI is worth ongoing expenditure given the productivity gains it provides. This will require them to spend more on ROI assessments and less on marketing hype.

Getting Started with CAPEX.com

Typically, investing in the technology sector is used as a core long-term investment strategy within a portfolio because of its growth potential.  Growth investing is an investment style and strategy that is focused on increasing an investor's capital. Growth investors typically invest in companies that possess a competitive advantage or companies whose market can grow - for example, the Generative AI market, which could boost global labor productivity by more than 1 percentage point a year in the decade following widespread usage, according to Goldman Sachs.

Traders, on the other hand, might be seeking to capitalize on short-term share price gains. Rather than investing in the shares, traders speculate on the share’s value. They can speculate on it rising by going long, as well as falling by going short. Some of the best Generative AI stocks are among the largest companies in the world are highly liquid and tend to be less volatile than other stocks and for these reasons are more popular among short-term and intraday traders.  

1. Trading the Generative AI Stocks and ETFs

Trading stocks means that you’re speculating on a share’s price movements with derivatives. They are leveraged products, which means that you won’t need to commit to the full value of the position. Bear in mind that leverage can increase both your profits and your losses.

With derivatives, you can ‘buy’ (go long) the shares if you think the stock’s price will rise, or you can ‘sell’ (go short) if you think the stock’s price will fall. Shorting with derivatives can be a way to hedge against downward price movements in your non-leveraged investment portfolio, or it can be a way to generate profits outright from shares that are falling in value. But when you go short your potential losses are theoretically uncapped because there’s no limit on how high the share price of the Generative AI stocks can rise.

2. Investing in the Generative AI Companies

Investors buy shares outright in the hope that they will increase in price and can be sold later for a profit. They uphold the traditional mantra of buying low and selling high – known as going long. Investors will take positions over a longer period, attempting to profit from share price changes as well as dividend payments.

While this means that they might need more initial capital to get started when compared to trading, their losses would be capped at this initial outlay. That said, investors should be aware that they might receive back less than they initially invested, even in the most valuable Generative AI stocks.

Trade and Invest in Generative AI stocks with CAPEX.com

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Final Words About Generative AI

Experts see generative AI on an improvement curve with prospects to transform businesses around the world, much like the internet has over the last quarter of a century. Yet it is precisely because generative AI is new, exciting, and evolving that we cannot take a static approach to the investment thesis. 

As Generative AI stock pickers, you should continually fact-check the investment case as the cycle around generative AI advances from peak expectations to enlightenment and productivity. The Generative AI story has only just begun and, investment funds expect, will be written for many years to come.

Free resources  

Before you start trading and investing in Generative AI, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more informed investment decisions.  

Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how leveraged trading work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.

FAQs About Generative AI

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Cristian Cochintu
Cristian Cochintu
financial_writer

Cristian Cochintu writes about trading and investing for CAPEX.com. Cristian has more than 15 years of brokerage, freelance, and in-house experience writing for financial institutions and coaching financial writers.