Last Updated: January 11, 2023
Picking the right stock to invest in requires you to have a reference point. Still, just because you know how to recognize a great opportunity, it doesn’t mean that you’ll have an easy time discovering it. This is what stock screeners are for.
So, what is a stock screener?
Simply put, it’s a tool specially designed to find the stock that fulfills all your pre-set criteria. In the hands of a seasoned trader, such a platform can become a powerful instrument. However, before using it efficiently, one must first understand how they work.
What are the most relevant stock characteristics? Are there any limitations to these tools? How do you pick the right stock screener, to begin with?
Let’s see if we can find the answers to these questions.
What Is a Stock Screener?
In today’s stock exchange, there are more investment options than ever before. This creates a scenario where it would be impossible to compare multiple stocks efficiently without spending countless hours comparing numbers. A stock screener is a tool designed to handle this entire research stage for you in a matter of seconds.
There are, however, some blank spots on the sheet that a stock screener can’t fill. While value stock screening is never a problem, screeners really can’t do much when it comes to non-quantifiable criteria. This is why you need to supplement this with some additional research.
Keep in mind that a stock screener is merely a starting point, and doing your research, you also need a day trading platform where you can place the orders.
How Does a Stock Screener Work?
While you don’t need to understand how a stock screener technically works in order to learn how to use it to screen stocks, a bit of extra knowledge sometimes goes a long way.
These tools operate on a principle of filters that you can apply as your own criteria. For instance, you can decide to have these stocks sorted based on EPS (earning per share), multi-year ROI (return on investment), RSI (relative strength index), etc.
With every new criterion that you include, the smaller the pool of stocks becomes. This allows you to narrow down your search and find the stock that has everything (or almost everything) that you’re looking for.
What is stock screening?
The simplest way to explain stock screening is to say that it’s the process of searching for companies that meet your financial criteria. You can use it to browse stocks by price or any other parameter.
For instance, you can set up the stock screener to look only for stocks with dividends above $20 per share. While you could technically discover these stocks manually, it would be a tiresome process.
The obvious conclusion here is that two factors affect the quality of the screening results:
- The platform of your choice (respectively, your ability to find the best stock screener for day trading).
- Your own knowledge (which determines the criteria that you set).
Like always with stock trading, it all comes down to your research and understanding of the very concept of day trading.
How to Use a Stock Screener?
To use a stock screener efficiently, you need to know two things.
- How to choose the right screener?
- Which criteria is the most relevant for stock screening?
Answers to these two questions are not as simple and straightforward as you hope them to be.
How to choose the right stock screener?
The first thing you need to figure out is what you need to look for in a stock screener. For instance, the financial criteria of the screener you need to examine are:
- Large database of stocks
- An extensive set of variables
- Great screening engine
Other than this, you also need to figure out whether you want a free stock screener or you’re ready to pay for the tool. Different screeners have different options included in their free and paid versions. This means that while one screener may have a superior free plan, the other may surpass it with its premium features.
Other than just financial variables, you also have to deal with quality-of-life features. The most important three criteria are:
- Real-time trading info
- User interface (UI) customization
Depending on your experience with share finders, you might notice that some tools or options are missing. This, however, may elude a first-time user. So, reading customer reviews could be a wise first step when selecting a stock screener.
One of the best ways to use a stock screener is to add as many requirements as possible. For instance, you may decide to invest in apparel companies.
- So, for instance, you enter the requirement and get about 50 results.
- Then, you narrow it down to companies that trade on the NYSE. This brings the number of results down to around 20.
- After this, you choose a P/E ratio that is under 25. This will bring the number down to around 10.
- Finally, you look for a set EPS growth over the past five years (let’s say 10%), as well as look for companies with debt/equity over 0.1. In the end, you should be left with 1-3 options.
If there’s one thing worth stressing out here is that before you start working your way up, you need to master the basic terminology.
How to search for stocks?
The first thing you need to do when you decide to start searching for stocks is to determine which criteria count the most.
The most important criteria
The KPIs that can be set with most stock screeners include:
- P/E ratio: The price-to-earnings ratio is a company’s current capitalization divided by its annual earnings. Historically, the average P/E for the S&P 500 has ranged from 13 to 15.
- P/S: Price-to-sales is an essential situational KPI that can help you examine high-growth companies with negative earnings. In most cases, P/S ratios between 1 and 2 are considered good, while ratios below 1 are considered excellent.
- PEG ratio: The PEG ratio is calculated by dividing the P/E ratio by expected earnings growth. This is useful when comparing two companies in a similar industry (even if they are in different stages of the business cycle). A PEG ratio of 1.0 or lower implies that the stock is fairly priced (in some cases even undervalued).
- Debt-to-equity: You get debt-to-ratio when you divide a company’s total assets with its debts. While a crude estimate, it helps you see the company’s reliance on debt (as a main source of funding). Generally speaking, the debt-to-equity ratio should not be above 2.0 (except for large companies in asset-heavy industries like mining or manufacturing).
- ROE: If you divide the company’s net income by its shareholders’ equity, you will get the return on equity. ROEs between 15% and 20% are generally considered good.
Remember that you also have the return on assets (ROA) and return on invested capital (ROIC), as well as operating income or loss, to consider.
There is no general rule of how to use a stock screener. The bottom line is that the more criteria you use, the greater the chance that you’ll find the exact stock you need. Afterward, you can come up with a fundamental analysis of the company in question.
Dividend and income
One more criterion worth discussing separately is the issue of dividend criteria. Namely, some investors seek passive income. So, what are you looking for when it comes to dividends? Also, what are the makings of a potentially ideal stock?
- Annualized dividend yield should be between 3% and 12%.
- The five-year average compound dividend growth should be above 3%.
- Dividend stock screener should also have the dollar amount paid per share in dividends.
- The higher the amount, the better.
- Payout ratios are the diluted earnings per share based on the trailing twelve months (TTM) from the latest quarterly report. Ideally, it should be between 10 and 60.
Once again, while you don’t have to use every single criterion, this kind of knowledge can help you optimize your stock screener use.
Limitations of Stock Screeners
Are stock screeners really so ideal? Well, there are several limitations to consider when stock filtering with these tools.
With stock screeners, all criteria are quantitative. This means that while you’ll be able to see dividends, stock value, etc., the tool won’t notify you of all the pending lawsuits, latest controversies, customer satisfaction issues, and so on. Sure, these might be reflected in the stock value, but this won’t always be the case.
For that reason, it is vital that you research the stock in question, not just rely on the screener for information.
Databases update on different schedules
Even the fastest stock screener app can’t be faster than the database that it draws its information from. Not all databases are updated regularly, which is why you must always check the timeliness of the data before you act.
Industry blind spots
Other things you need to keep in mind are the industry-specific factors and blind spots. Sometimes, no company will fulfill your search, which means that you’ll have to adjust your requirements. The best way to handle this issue would be to get familiar with industry averages (across all criteria) before you actively start trading.
Using a stock search tool is the best method for narrowing down your list of potential stock investments. This can help you get the numbers right and figure out the stock’s current financial standing.
However, stock screeners can’t reveal absolutely everything you need to know about the stock before buying. Therefore, you need to research the company, including any recent business and industry-related news and forecasts.
Ultimately, when it comes to stock screen tools, there are three things you need:
- The right stock screening platform.
- Understanding of essential screening criteria.
- Awareness of stock screener limitations.
Only after this will you have a clear picture of what you’re up against.
After you’ve picked up the right stock screener, you need to select the criteria that it will use for filtering stocks. You can set various descriptive, fundamental and technical metrics to narrow down your search. Eventually, this way, you can optimize your investment strategy.
Some of the best stock screeners are platforms like Trade Ideas, FinViz, or TC2000. Due to their real-time trading info, free education materials, and many available technical tools, they provide you with all you need to elevate your stock trading game to the next level. In 2021, you should also look for a stock screener with AI capabilities.
A stock screener is there to help you narrow down your focus. It allows you to be a technical trader without having to do too much research manually. This way, you select some criteria and set the screener to it. Then, you invest all your time into researching these few stocks that actually fulfill your requirements instead of exploring hundreds of stocks.
After figuring out what is a stock screener and how it works, you’ll know that such a tool can save you time and effort. And this means that it’s definitely something you should consider using. The stock filters are designed to make your approach to trading much more efficient. Keep in mind, though, that you’ll still have to analyze the stock before deciding to buy. The screener is there merely to help you choose an exact company to research.
To pick the right stock, you need to set your initial criteria, find the options that satisfy them, and make your decision based on facts. The paradox of choice is always a problem. But with extensive research, reasonable risk assessment, and market understanding, you increase your chances of success.