Stock Screening and Choosing a Stock Screener
Stock screening is the practice of finding companies that satisfy particular 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 number of questions like:
> Are you for small-cap or large-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?
With good screeners, you can search according to almost any criteria you want. After entering your answers, you get a list of stocks that fulfill your requirements. By concentrating on the quantifiable factors that affect a stock’s price, stock screeners assist users with 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
With basic screeners, you have a fixed set of variables that you set values to 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. While some good screeners are available for free, if you’d like the newest and best technology, you should go for a custom screening subscription.
The most challenging part of using screens is setting the criteria for your search. 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 assist investors, some sites have predetermined stock screens, where variables are already put in.
What to Look Outfor When Using Stock Screeners
Again , stock screeners are very useful tools, but don’t expect much from the free versions. Keep the following in mind:
1. Majority stock screeners only deal with measurable factors.
For your part, you also have to look into qualitative issues, like pending lawsuits, customer satisfaction, and so on.
2. Screeners use databases which update on variable schedules.
Always check the freshness of the data – if the data aren’t new, your search is probably meaningless.
3. Watch out for industry-centric blind spots.
If you are trying to find low P/E valuations, for example, don’t think there will be many tech firms coming up.
Stock screeners are no magic pills for stock selection, but a good one can help put you in the right direction. And as good screeners require resources to construct, you should never hesitate to invest in a well-crafted product.