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 parts: an index of companies, a set of predefined variables and a screening engine that identifies the companies that are in line with those variables and reports matches.
Using a screener is rather simple. First you answer a group of questions like the following:
> Are you for small-cap or large-cap stocks?
> Are you interested in stock prices at all-time highs, or companies whose stocks have dropped in price?
> What price-to-earning (P/E) ratio range is acceptable to you?
With good screeners, you can search according to almost any criteria you want. After inputting your answers, you will be given a list of stocks fulfilling your requirements. When you focus on the scientific factors that impact a stock’s price, stock screeners aid users in conducting quantitative analysis. Thus, screening mainly involves precise variables like revenue, profit margins, market capitalization, and volatility, along with performance ratios such as debt-to-equity or the P/E. Apparently, you cannot search a screener using keywords like “a company that provides the best products”
Basic vs. Custom Screeners
Basic screeners have an encoded set of variables where you simply assign the values as your criteria. On the ABC basic screener, for instance, there is a variable that examines stocks according to market cap, allowing you to find companies that are above or under the $400 million mark 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 biggest challenge when it comes to using screens is defining your search criteria. There is a whole world of variables out there that make for near endless possibilities for various combinations. Screeners are significantly flexible, but if you’re not clear about what you want and why you want it, the benefits you get will be limited. To aid investors, some sites have preprogrammed stock screens, with variables already inputted.
What to Watch Out for When Using Stock Screeners
Again, while they are helpful tools, free stock screeners are limited. Keep the following in mind:
1. Majority stock screeners only deal with measurable factors.
For your part, you need to factor in qualitative concerns, including labor problems, customer satisfaction, pending lawsuits, and other things similar.
2. Screeners have databases updating at different schedules.
Make it a point to check the freshness of the data – if they are old, your search could be of 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.