Many stock investors want to find the next stock that generates substantial returns. It takes considerable research to find these stocks, and not every investment idea is guaranteed to be a winner. Some investors use stock screeners to increase their chances of finding top-performing stocks. Other investors use this tool to find stocks that align with their portfolio objectives. This guide will cover how stock screeners work and why investors should consider using them.
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Introduction to Stock Screeners
If you haven’t heard of a stock screener yet, you’re not alone. This guide will shed some light on how these important tools work.
What is a Stock Screener?
Stock screeners are tools that make it easier for investors to find stocks that fulfill certain criteria. These screeners help investors find stocks that align with their portfolio objectives. Each parameter you include in a stock screener will further reduce your options and leave you with stocks that check off several items on your checklist.
The Purpose and Importance of Stock Screeners
Stock screeners help investors come across stock ideas that align with their portfolio objectives. You can look up “Stocks to Buy” and see which stock recommendations appear. However, these are broad recommendations that may not be the best fit for your portfolio. Stock screeners are a critical resource for investors who conduct research to find top picks, undervalued investments, and hidden opportunities.
How Stock Screeners Work
Stock screeners have data on every stock in the stock market. While a list of every available stock can do some good, stock screeners shine because of their criteria. You can filter stocks based on several factors, such as year-over-year revenue growth, 52-week price performance, and other variables.
As you enter inputs, fewer stocks will appear on your screen. The remaining ideas will fulfill all of the parameters. These stock screeners simplify finding the needle in the haystack and can help you distinguish the needles and the hay without as much effort.
Common Features of Stock Screeners
Stock screeners use several parameters. These parameters help investors find ideal stocks for their portfolios. These are some of the parameters you can use to filter stocks in a screener:
- Market cap
- Revenue growth
- Earnings growth
- 52-week performance
- P/E ratio and other valuation metrics
- Analyst ratings
- Dividend yield
- EPS growth
- Price and volume
- Industry and sector
How to Make Use of Data Filters
Data filters don’t do all of the thinking for you. Savvy investors still have to know which data filters make the most sense based on their risk tolerance and financial goals. Having an idea of what you want before using stock screeners can help you make better use of these resources. Investors should consider if they want cash flow or growth and what qualities make a good investment. Each investor is different, and some will focus on good technical indicators, while others will focus on fundamental analysis.
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How to Use a Stock Screener
Stock screeners are incredibly valuable resources for stock investors. Here’s how you can approach using stock screeners.
Setting Up Your Criteria
Investors have several criteria available in a stock screener. You can review the parameters, experiment with them, and decide which ones make the most sense for your portfolio.
Interpreting Results
Not every stock that shows up is a good buying opportunity. Some stocks fulfill all of your parameters, but investors have to analyze individual stocks to see if these investments make sense. For instance, a stock can have a good P/E ratio because investors are nervous about the stock’s future prospects. Investors can see this trend if the forward P/E is significantly higher than the current P/E ratio. A higher forward P/E ratio indicates declining financials.
Some dividend investors filter results based on a minimum dividend yield. However, these investors may also consider a dividend’s growth rate. If a stock with a 3% yield grows its dividend by 2% each year, the dividend investor doesn’t have as much to gain from dividend growth. However, a stock with a 2.5% dividend yield that is increasing its dividend by 20% every year can eventually overtake the stock with a higher yield.
Knowing what you want will make it easier to interpret results and make better decisions for your portfolio.
Refining Your Search
Using a single parameter will eliminate many stocks from the list. For instance, if you want stocks with P/E ratios, you will remove the unprofitable companies from the list. However, you will still have a mixed bag of available stocks. Some profitable companies are rapidly declining. Other companies have strong profit margins but lofty valuations.
Each additional parameter you include leads to fewer differences among the assets that show up on a stock screener. If you pick good parameters, fewer differences can increase the likelihood of making profitable investments.
Different Types of Stock Screeners
Investors can choose from several types of stock screeners. Here’s what you can expect from each option.
Basic Stock Screeners
These stock screeners do not have many parameters but offer a good starting point. You can still filter stocks and find which ones you like, but once you get comfortable with a basic stock screener, you should look for a more advanced tool.
Technical Analysis Stock Screeners
Technical analysis stock screeners focus on technical indicators and analysis. You can filter stocks based on their moving averages, crossovers, and other indicators. Technical analysis stock screeners are better for traders than investors, but some investors use long-term technical indicators for their decision-making.
Fundamental Analysis Stock Screeners
Fundamental analysis stock screeners focus on a stock’s financial performance. Investors look for companies with growing revenue and earnings along with good balance sheets. Fundamental analysis caters to long-term investors who want to hold onto companies for many years to come.
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How Reliable Are Stock Screeners?
Stock screeners are reliable. These screeners have data on thousands of stocks that you can filter based on various parameters. Stock screeners do not guarantee that you make better decisions as a trader or achieve higher portfolio returns. However, these stock screeners do what they promise.
Is a Stock Screener Worth It?
A stock screener is a useful resource for any investor who wants to find under-the-radar stocks that align with their portfolio goals. Stock screeners make key data points across many stocks easier to access and compare. Many investors can benefit from using stock screeners.
The Benefits of Using Stock Screeners
Stock screeners have several advantages. These are some of the perks to keep in mind when using stock screeners.
Saving Time and Effort
Stock screeners can save you hours of time by simplifying your research. You don’t have to analyze a stock if it does not fulfill your requirements. You also get a shortlist of companies that check off your investment requirements.
Customizable and Flexible Research
Stock screeners make it easy to filter stocks based on your preferences. Some of these screeners have hundreds of parameters you can use to shortlist investment opportunities.
Advanced Financial Analysis
You can get detailed statistics and a group of stocks that fulfill your requirements within a few clicks. Investors can choose whether to gear their stock screeners for technical or fundamental analysis. Some screeners let you incorporate both analyses to end up with a shorter list of stocks.
Improved Decision Making
Stock screeners offer quicker access to pertinent information. You can use more data points and parameters to make better decisions for your portfolio.
The Limitations and Risks of Stock Screeners
Stock screeners have many advantages, but they aren’t perfect. These are some of the limitations and risks to keep in mind.
Incomplete or Misleading Data
Some stock screeners do not get updated frequently and may have outdated information when earnings reports come out. It can take some time for some stock screeners to update their statistics.
Over-Reliance Dangers
Stocks that fulfill all of your parameters aren’t necessarily good stocks. Relying too much on a stock screener can lead to bad investments and also limit you from finding other investment opportunities that can generate strong returns.
The Need for Supplemental Research
Your research does not begin and end with a stock screener. Stock screeners give you investment ideas, but you must conduct additional research on each idea before investing in a stock.
How Much Does a Stock Screener Typically Cost?
Many stock screeners are free. Some brokerage firms offer stock screeners but require that you have an account to access the screener. Advanced stock screeners may cost a few hundred dollars each year.
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Some Tips on Crafting an Effective Screening Strategy
Stock screeners are useful resources, but they only work if you have the right strategies and mentality. These are some tips that can help you craft an effective screening strategy.
Choosing the Right Filters
Investors should assess their goals when establishing filters. Some investors look for growth opportunities and pick small-cap stocks with high revenue growth. Other investors are more conservative and opt for large-cap dividend stocks with healthy profit margins. You have to know what you want before setting filters. Some investors can discover what they want by reviewing a stock screener’s available filters.
Combining Multiple Criteria
Investors should combine multiple criteria instead of using one parameter for their stock screeners. Multiple parameters result in a shortlist of stock ideas, which can lead to higher returns and less time on research.
Regular Review and Adjustments
Investors should review how their portfolios perform with recently acquired stocks. Reviewing portfolio performance can help investors gauge whether their current screener parameters work. Investors should regularly review their results and make necessary adjustments along the way.
Conclusion: Maximizing the Use of Stock Screeners
Stock screeners are useful tools that help investors save time and can lead to higher returns. Maximizing the use of stock screeners can lead to you becoming a more successful investor. Investors should review the criteria and test out their stock screeners. Each day you use a stock screener, you will become more comfortable and confident with this tool.
