AI Index Trading: How to Trade The AI Stocks Index

The artificial intelligence (AI) market has experienced explosive growth, captivating traders worldwide with its dynamic potential. As of 2023, the global AI market is valued at an impressive $196.63 billion, according to Grand View Research, marking a substantial increase of around $60 billion from the previous year.

This rapid expansion is driven by the ever-growing practical applications of AI technology, ranging from content creation to autonomous vehicles. Grand View Research also expects the market to skyrocket to $1.81 trillion by 2030, boasting a staggering compound annual growth rate (CAGR) of 38.1%.

This Plus500 guide provides a guide to navigating the world of AI index trading. It explores how traders can potentially capitalise on this burgeoning market by trading AI stocks using contracts for difference (CFDs).

AI Index Trading

Trading AI stocks can present diverse opportunities for traders seeking exposure to the AI sector. While some traders may opt for directly funding AI-centric companies, others may want to leverage the potential of industries poised to reap substantial benefits from widespread AI adoption.

Apart from directly funding AI companies, traders may also explore alternative avenues to capitalise on AI. These can include exchange-traded funds (ETFs) focused on AI or thematic allocations in sectors expected to flourish with AI integration.

However, for those seeking a comprehensive approach encompassing the breadth of the AI landscape, AI index trading emerges as a useful strategy. By trading AI indices, traders gain access to a broader spectrum of instruments, thereby diversifying their portfolios and alleviating the need to select individual stocks.

One such index is the BITA Artificial Intelligence Giants UST Index (BAIGU), and as of May 2024, its one-year annualised returns have reached over 20%.

What Is the BAIGUI?

The BAIGUI was launched on April 27, 2023, with an initial value of 1000, denominated in US dollars (USD). Constituent companies are selected from the US stock market based on their revenue generated within the AI sector, covering various domains like microprocessors, data centres, and machine learning.

This index follows a semi-annual rebalancing schedule and employs a free-float market capitalisation weighting mechanism, where market capitalisation is calculated by multiplying a stock's price by the number of shares available for trading in the market.

As of May 2024, the BAIGUI comprises 20 constituents.

Top 10 Constituents of the BAIGUI

1. Nvidia (NVDA) (18.82%) - NVIDIA Corporation (NVDA) is a prominent American semiconductor company known for manufacturing high-end graphics processing units (GPUs) and its major contribution to AI development.
2. Aspen Technology Inc. (AZPN) (10.33%) - Aspen Technology, Inc. offers industrial software designed to assist customers in asset-intensive industries globally.
3. Palantir Technologies (PLTR) (9.68%) - Palantir Technologies Inc. develops and implements software platforms for the intelligence community to support counterterrorism investigations.
4. SentinelOne Inc. (S) (8.96%) - SentinelOne, Inc. is a cybersecurity provider operating both in the United States and internationally.
5. Altair Engineering (ALTR) (8.57%) - Altair Engineering Inc. and its subsidiaries offer software and cloud solutions in simulation and design, high-performance computing, data analytics, and artificial intelligence both in the United States and internationally.
6. Dynatrace (DT) (8.08%) - Dynatrace, Inc. offers a security platform for multi cloud environments, enabling customers to modernise and automate IT operations, develop and release software, and enhance user experiences.
7. Informatica Inc (INFA) (6.21%) - Informatica Inc. develops an AI-powered platform that connects, manages, and unifies data across multi-vendor, multi-cloud, and hybrid systems at an enterprise scale globally.
8. Alarmcom Holdings (ALRM) (5.58%) - Alarm.com Holdings, Inc. offers solutions to control and monitor security systems and Internet of Things (IoT) devices, such as door locks, garage doors, and thermostats.
9. C3Ai Inc. (AI) (4.43%) - C3Ai Inc offers the C3 AI platform, a development and runtime environment that allows customers to use enterprise AI applications.
10. Ambarella (AMBA) (3.35%) - Ambarella, Inc. creates semiconductor solutions for HD and Ultra HD compression, image signal processing, and AI processing worldwide.

How to Trade the AI Index Using CFDs

CFDs or Contracts for Difference allow traders to speculate on the upward and downward fluctuations of the AI Index’s value without owning the underlying stocks.
Traders open a "Buy" position or "go long" if they believe the value of the AI Index will rise, while they opt for a "Sell" position or "go short" if they anticipate a decrease in value.

One key feature of CFD trading is that leverage allows you to increase your trade size while committing a relatively small amount of capital. Keep in mind, however, that while increased exposure can magnify potential profits, it can also magnify potential losses.

Furthermore, with CFDs, you don't need to deposit the full value of the asset to open a position; instead, you can deposit just a percentage of the total amount. This deposit, known as "margin", makes CFDs a leveraged financial product.

AI Index CFD Trading Example

For example, with leverage of 1:10, traders would need $1,000 to gain exposure to a $10,000 position in the AI Index. Leverage ratios may be different depending on the instrument traded.

Trading index CFDs may offer advantages, including instant execution during trading hours and the ability to increase purchasing power through leverage. By trading on indices, traders can potentially diversify their risk exposure, benefiting from a broader market perspective rather than relying on the performance of a single stock.

It's crucial for traders to be mindful of the risks associated with trading CFDs on indices, as unpredictable price fluctuations can lead to substantial losses.

Although index trading can provide a more stable option due to the collective movement of multiple companies within the index, the leveraged nature of CFDs necessitates careful consideration of one's position. Proper risk management and a thorough understanding of market dynamics are essential for successful trading in this sector.

BAIGUI CFD Trading Strategies

A well-defined trading strategy is crucial for making informed decisions, controlling inherent risks and maximising potential earnings when trading BAIGUI.

Traders can customise strategies to match their preferences and combine them with other strategies to enhance effectiveness. Key considerations for selecting a trading strategy include personal goals, risk tolerance, experience, and trading preferences.

When trading indices, traders can employ various strategies to make informed decisions about the market's direction. Two such strategies are trend trading and breakout trading.

Trend Trading

One effective strategy for trading AI stocks is trend trading, which leverages price chart trends and recurring movements to analyse the overall direction of assets. Trend traders can benefit from both upward and downward price movements, depending on the identified trend.

To implement this strategy, traders need to evaluate the trend and its duration to assess stability, pinpoint entry and exit points, and be prepared for occasional minor price fluctuations that may result in losses.

Trend trading can be applied across various time frames, from short to medium to long term, though it often aligns with a prolonged approach known as position trading. Position trading involves holding positions for an extended period, ranging from weeks to months, and relies heavily on fundamental analysis and macroeconomic trends to make informed decisions. This method allows traders to capitalise on more substantial market movements and long-term trends, making it a strategic choice for those with a patient and informed approach to trading the BAIGUI.

Breakout Trading

Breakout trading is another prominent approach for position traders, focusing on identifying key levels of support or resistance within a market. This strategy evaluates whether there is sufficient momentum to breach these levels, with the prevailing trend expected to continue before potentially reversing.

Technical analysis tools help identify support and resistance levels, enabling traders to speculate on the price direction once these levels are breached. This potentially offers opportunities to go long on resistance breakouts or sell on support breakouts.

Risk Management

Effective risk management is crucial in trading to safeguard your capital. The Plus500 platform provides several trader-centric tools to assist in managing trades.

One example is the 'close at profit' feature, which automatically exits a position once a certain profit level is reached, and the 'close at loss' feature, which limits potential losses by setting a maximum loss threshold. While these features are free, they do not guarantee that positions will close precisely at the specified price level.

Conclusion: Understanding the BAIGUI

The AI market's unprecedented growth presents an array of opportunities for traders. With a projected valuation of $1.81 trillion by 2030, AI technology is set to revolutionise various sectors, making it a compelling area for speculation.

Trading AI stocks through CFDs offers a flexible and diverse approach to gain exposure to this dynamic market.

The BAIGUI, encompassing leading AI companies, provides a foundation for traders seeking diversified exposure. Employing strategies like trend and breakout trading can help traders make informed decisions about trades. However, it's crucial to implement effective risk management practices to navigate the inherent volatility and leverage risks associated with CFD trading.

If trading the AI Index interests you, you can start trading BAIGUI CFDs with Plus500.

AI Index Trading FAQs

What is AI index trading?

AI index trading involves allocating funds to a collection of AI-related stocks bundled into an index, such as the BITA Artificial Intelligence Giants UST Index (BAIGUI). This approach allows traders to gain exposure to the AI sector without selecting individual stocks, providing diversification and potentially reducing risk.

What is the BAIGUI, and how is it composed?

The BAIGUI, or BITA Artificial Intelligence Giants UST Index, includes companies from the US stock market that generate significant revenue from AI-related activities. As of May 2024, it comprises 20 companies, including Nvidia, Aspen Technology Inc., and Palantir Technologies. The index is rebalanced semi-annually and uses a free-float market capitalisation weighting.

What are the risks associated with AI index CFD trading, and how can they be managed?

Trading AI index CFDs involves risks such as market volatility and potential losses due to leverage. Effective risk management strategies include setting stop-loss and take-profit orders, using leverage cautiously, and maintaining a thorough understanding of market dynamics. Platforms like Plus500 offer tools to help manage these risks, such as automatic position closure options.