Stock screening always boils down to finding the answer to one fundamental question:
- Which stock (among all stocks) should I purchase right now?
Of course, finding the answer to this question requires asking many more specific questions about stocks – questions that are difficult to answer without the help of computerized databases.
‘Stock screening‘ is a process that permits investors to discover and analyze useful information from a larger set of information. The Internet provides many screening tools that help you prospect stock issues. The goal of stock screens is to point out which stocks are worth your research and analysis time.
To identify investment candidates, the stock screen uses your preset criteria, such as:
- Growth – stocks that are expanding faster than the market or their peers
- Value – stocks that have strong financial statements but are selling at prices below their peers
- Income – stocks that provide higher than average dividends
When screening, identifying exactly what types of stocks you personally feel are important to your investment goals. Make sure you write and review a detailed list of your investment objectives and the characteristics of your ideal investment. Don’t forget to consider your performance expectations and risk-tolerance level (learn how to Eliminate Risks).
Choosing Stock Screening Criteria
The first stock screen that you develop may include quantifiable variables that you believe are the most important. For example:
- Earnings growth: The percentage of change between current earnings and earnings for the last quarter or last year.
- Recent earnings surprises: The difference between predicted and actual earnings.
- Price/earnings (P/E) ratio: The current price of the stock divided by the earnings per share (net income divided by the total number of common shares outstanding). For example, value stocks have P/E ratios below 10 or 12, and growth stocks have P/Es above 20.
- Dividends: The annual cash dividend paid by the company. You may want to find out of stock dividends are important.
- Market capitalization: The number of outstanding shares multiplied by the current stock price of those shares. Market capitalization is sometimes abbreviated as ‘cap’. This value is a measurement of the company’s size. Firms with high market capitalization are called large cap, and companies with a low market capitalization are called small or micro cap.
- Stock Spam: Stock market spam can influence the price of a stock dramatically – especially in smallcap or pennystocks. Qwoter.com provides a stock spam report for publically traded companies.
Watching Out for Investment Risks
Using Your Stock Screen Results
After you complete your second stock screen and sort the data, you should have a list of 10 to 20 companies. Start a file for each firm and begin to gather data for your analysis. At this point, you might discover that some companies aren’t worth additional research – a finding that further reduces your short list. For example, the company may have filed for bankruptcy, or it may be targeted for federal investigation. Maybe the company recently paid a large fine for shady dealings, or the executive management was recently indicted for fraud, misconduct, or some other crime.
Starting with Online Stock Screens
Web-based stock screens can require between 2 and 80 variables. Computerized stock databases can include anywhere from 1,000 stocks to more than 13,000 stocks. Additionally, computerized stock databases are updated daily, weekly, or monthly. The best stock screen is the one that includes your personal investment criteria. Some stock screeners are very comprehensive and offer excellent results. Unfortunately, these screens are often the hardest to use.
Here are a few examples to get you started in your stock screening process. The list contains popular and simple stock screeners that offer good results for little effort:
- Google Finance – Google Finance offers an easier way to search for stocks, mutual funds, public and private companies. Further, Google Finance also offers a broad range of company news and information in order to deliver more relevant, unbiased results in a clean, uncluttered user interface.
- Yahoo! Finance – Use their stock screener to search stocks by industry, index membership, share data such as price, market cap, beta, sales and profitability, valuation ratios, analyst estimates. Create your own screens with over 150 different screening criteria.
- MSN Money – Stocks Research provides in-depth information on stocks, including quotes, charts, news, company reports, SEC Filings, analyst ratings, financial results, insider trading and more. Use their Research Wizard to research any stock.
- Morningstar Screener – Morningstar’s powerful Stock Screener helps investors find the right stocks to buy. Search their database of more than 7,000 stocks.
- AOL Money – Find Stock quotes and mutual fund quotes including last stock quote price, real-time quotes, after hours data, change, volume, daily high and low, fundamental data, finance news, finance blogs, stock blogs, stock portfolios and more.
- Market Watch – Technical Stock Screener by MarketWatch offers a free stock screener. Sort by various fields with our online stock market screeners.
What is your favorite stock screener? Share your advice by adding a comment below!