Stock screeners have been used by the Wall Street elite for decades. Finding stocks that fit specific criteria for earnings, dividend, growth and volatility might sound like a time consuming task, but now you can have access to Wall Street’s most useful tools for free!
A stock screener is a software that sorts through a large number of stocks and alerts you to anything that might be of interest. Generally, an investor would plug in specific criteria, and the software would find stocks that meet the parameters. Screener software can be used to identify growth, value, and emerging stocks if you set the correct parameters.
Stock screens have historically been used for only technical analysis. But with the advancement of data collection, screens such as Finviz are able to provide statistics based on fundamental factors, not just chart movements.
What is a Stock Screener & How Does it Work?
A stock screen as described above is a tool investors use to analyse the technical & fundamental aspects of multiple companies at the same time.
You enter specific criteria you want to look for across the entire market, and the screener looks for stocks that match. You then get given a list of companies that fit your specifications.
Low power stock screeners are usually available on brokerage trading platforms for free, but there are some independent companies that are beginning to offer fully loaded screeners either for free, or on a subscription basis.
The stock screeners created for the sole purpose of research are much more powerful than ones available on specific brokerage accounts. They offer a higher level of search, more metrics you can set, and a vaster range of data. Some examples of these types of stock screeners are:
- Trade Ideas
- Market Watch
- Morning Star (Incorporated into it’s already existing research site)
How Do Stock Screeners Work
By allowing investors to weed out the rubbish when searching for stocks, they cut research time in half. Because you don’t waste time looking at companies that don’t pass the first test.
That is what stock screeners effectively do… Test the market for parameters you set.
Users begin by choosing the requirements they want to look for. For example, you could filter stocks using P/E ratios, Dividend Yield, EPS, Moving Averages, Market Cap and many more.
If you set the requirements to:
- P/E Ratio under 20
- Dividend Yield above 2%
- Positive Yearly Growth for prior 5 years
The screener will only show you companies that fit all those points. The more criteria you add, the more specific your search, and the smaller your sample size. Good screeners will allow you to input requirements for almost all metrics and indicators.
How Stock Screeners will Improve your Investment Strategy
If you’re looking for an investment, there are thousands of companies you can choose from. Using a stock screener you can filter out the trash, and look at companies that appeal to you.
By using the stock screeners database, you can weed out stocks from a massive range, to a more manageable list which qualify for further analysis.
You can use a stock screener to:
- Save time on research.
- Discover new companies and investments you wouldn’t have usually noticed.
- Remove emotion from choosing stocks by only focusing on specific criteria.
- Manage your risk by hand picking stocks that appeal to you from your dataset.
We already know how stock screeners can save you loads of time. But let’s have a look at how they can lower your risk when investing.
How Stock Screeners can Lower Risk when Investing
Going back to the points above, when you remove the emotional aspect of choosing an investment, and focus solely on the data presented, you reduce the amount of behavioural bias imposed on the stock.
When we use a stock screener, we are looking for a target company that fits the criteria we set out.
So if we set our parameters for P/E ratio, Dividend yield, and EPS. The screener will shoot out a list of companies. Only paying attention to the companies we are provided removes our emotional bias from this investment. By disregarding the wider market, which doesn’t fit our requirements we have already lowered our risk by removing emotional attachments to other companies & false hype from other investors.
For example: If I really like Nike products, I might think the stock is a good investment. However, the P/E ratio is too high, the dividend yield is too low, and the company is currently trading higher than its intrinsic value. So the stock screener will not include Nike in my search, because based on the statistics, Nike is not the type of company I am looking for.
By setting my targets in the stock screener, it takes away my emotional connection with companies that don’t fit my investment strategy, it also takes away the hype created by other investors. Investing emotionally leaves you open to huge risk.
Currently in 2021, stocks are at all time highs, so it can be scary investing in large cap stocks such as Nike and Apple. That is why we use stock screeners, to get rid of the ‘expensive’ companies, and look for those trading closer to their fair value. Don’t fall into the trap of following the herd, invest in companies you research.
How Stock Screeners Help you Discover New Investment Opportunities
Think of it this way… You only know the companies in the news, or in your portfolio! So where will you look to find new opportunities?
The Finviz stock screener has over 7,000 companies in its database. So it’s likely that you will come across a couple you’ve never heard of.
Don’t get me wrong, most of these companies won’t be worth your investment. But if you look at companies that have done well in the past. Such as Apple, Microsoft, AbbVie and Coca-Cola, you will see patterns in the technical indicators.
This gives you a bench mark when looking for similar companies. The stock market tends to repeat history, so the next Tesla or Amazon is just around the corner, you can use stock screeners to find them.
How to Get Started with Stock Screeners
The first step with screeners is deciding which platform to go with. I use Finviz, and we have a full review of their platform here!
There are loads of different screeners, some (like Finviz) are free, and others cost a monthly subscription. I’ve outlined the market leaders earlier in this article.
Next is to choose which metrics you want to constrict, for this I’ll be using the Finviz platform, but they all look similar:
All of these might seem scary, but as I’ve mentioned, you can choose which ones are important to you. The only ones I would recommend everyone should look at are:
- P/E Ratio: So you can see if the stock is expensive compared to its earnings. (A P/E Ratio under 15 is considered great for most industries)
- Which Exchange: I would only look for companies in specific countries to avoid currency conversion risks.
- EPS: I would only recommend finding companies that have a positive EPS showing that they make a profit.
The rest of the metrics are up to you. You can be a specific as you want. But remember that… The more parameters you enter, the less companies you will have to choose from.
Stock Screening isn’t the End!
A stock screener should only be a tool in your box, not the deciding factor for investment.
The reason we use a screener is to find opportunities and new ideas. There is more research and analysis to be done after we have found the potential company we wish to buy.
Remember, we are buying businesses, not ticker symbols or technical markers!