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 number of questions like:
> 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 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. 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. You obviously cannot use a screener to find a company that, say, “offers 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. 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. Though there are a few good free screeners available, if the latest and the best technology can only come from a screening service subscription.
The most challenging aspect of using screens is determining the criteria for the search. With tons of variables, there can be almost endless combinations and possibilities. 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 Look Outfor When Using Stock Screeners
Even as they are highly useful tools, again, free stock screeners don’t offer much. Take note of the following:
1. Majority stock screeners only deal with measurable factors.
For your part, you must also consider qualitative matters, such as labor problems, pending lawsuits, and the like.
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.
For instance, if you are looking for low P/E valuations, don’t expect a lot of tech companies to come 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.
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