Stock Screeners and How to Pick the Right One
Stock screening is a method of finding companies that come up to special 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.
It’s easy to use a screener. First you answer a few questions as below:
> Are you for small-cap or large-cap stocks?
> Are you aiming for stock prices at all-time highs, or companies whose stock prices have decreased?
> What price-to-earning (P/E) ratio range will you be comfortable with?
The good screeners allow you to search based on nearly any criteria you would like. Once you have input your answers, you receive a list of stocks meeting your requirements. By concentrating on the quantifiable factors that affect a stock’s price, stock screeners assist users with quantitative analysis. Therefore, screening is more concerned with exact variables like market capitalization, revenue, profit margins, and volatility, including performance ratios like the P/E ratio or debt-to-equity ratio. Obviously, a screener can’t be used to search for a company that, say, “has the best products.”
Basic Screeners or Custom Screeners?
With basic screeners, you have a fixed set of variables that you set values to as your criteria. For instance, a variable on the ABC basic screener sifts stocks by market cap, letting you find companies that, say, are under or over the $300 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 highly adaptable, but unless you know what you’re looking for or for what reason, they offer very few benefits. To provide assistance to investors, some sites have preset stock screens, where variables have already been encoded.
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. Pay attention to industry-specific 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 not magic pills for picking stocks; however, a good one will place you in the right direction. And because a good screener takes resources to build, you shouldn’t hesitate to invest in a well-designed product.