Stock Screening and Choosing a Stock Screener
Stock screening is a means of looking for companies that meet specific financial criteria. A stock screener has three elements: a directory of companies; a set of predetermined variables; and a screening engine that spots the companies that suit those variables and produces a list of matches.
Using a screener is not at all difficult. First you answer a group of questions like the following:
> Which do you prefer: large-cap stocks or small-cap stocks?
> Are you trying to find stock prices at all-time highs, or companies with low-priced stocks?
> What price-to-earning (P/E) ratio is tolerable for you?
Good screeners let you search with just about any criteria you want. Once you have input your answers, you receive a list of stocks meeting your requirements. When you focus on the scientific factors that impact a stock’s price, stock screeners aid users in conducting quantitative analysis. Hence, screening mainly deals with concrete variables like profit margins, market capitalization, volatility and revenue, and also P/E, debt-to-equity and other performance ratios. You obviously cannot use a screener to find a company that, say, “offers the best products.”
Basic versus Custom Screening
Basic screeners have a programmed set of variables and you simply set the values as your criteria. One variable on the ABC basic screener, for example, selects stocks based on market cap, enabling you to find companies that, say, is short of or well over $200 million in market capitalization. Even as there are some good free screeners in the market, subscribing to a screening service will give you the freshest and best technology.
The biggest challenge when it comes to using screens is defining your search criteria. With tons of variables, there can be almost endless combinations and possibilities. Screeners are very adaptable, but if you’re not sure what you’re searching for or why, they can only give you limited benefits. To provide assistance to investors, some sites have preset stock screens, where variables have already been encoded.
What to Watch Out for When Using Stock Screeners
Again, while they are helpful tools, free stock screeners are limited. Take note of the following:
1. Most stock screeners only work with quantitative factors.
For your part, you must also consider qualitative matters, such as labor problems, pending lawsuits, and the like.
2. Screeners use databases that don’t all update at the same time.
Be sure to check how fresh the new data are – if they’re old, your search would be of little or no value.
3. Watch out for industry-centric blind spots.
For example, if you are looking for low P/E valuations, don’t be surprised if you there aren’t many tech companies showing up.
Stock screeners are not a magic pill for choosing stocks, but a good one can help you immensely. And because a good screener takes resources to build, you shouldn’t hesitate to invest in a well-designed product.