With more than 45,000 stocks listed on major exchanges around the world, it’s easy to throw up your hands and leave the stock picking to somebody else. But what if you want to take control of your portfolio? How do you decide which stocks to buy?
Do you invest based on what you overheard somebody say at a party? Do you cue off what some stock guru said on a business news show? Or, maybe you just buy what your broker recommends?
If you’re ready to venture out on your own and choose stocks for yourself, the amount of available research can appear positively overwhelming. Many people simply don't have the time to undergo the herculean task of separating the wheat from the chafe. If you are one of those investors, take heart. There is actually a simple and easy-to-use method of narrowing the field so that you can hone in on those stocks that might meet your investment criteria. You can use a stock screener.
The Ins and Outs of Stock Screening
A stock screener searches a database of stocks for the criteria you specify, narrowing down the world of equities to just a handful of conforming companies.
There are many stock screeners available, varying in the number of categories they list and their level of sophistication. Some allow only a few variables to be entered, while others allow up to 500 inputs. Access to the more sophisticated screeners with all the best technology and latest bells and whistles will probably require paying for a subscription, but for the beginner, there are a number of good free screeners that you can use until you get the hang of it. Nasdaq, Google and Yahoo! Finance sponsor some excellent free screeners.
Stock screeners have input parameters such as industry/sector, share data (price, dividend yield), growth statistics, and financial ratios (P/E, return on equity). Let’s look at an example of how these parameters can be customized.
The resulting list would help you narrow down your options, so you no longer have to sift through thousands of stocks that don't meet your requirements. Some screeners even have popular sets of criteria pre-selected, making things even simpler.
But remember that while stock screeners are an excellent tool, they have some limitations.
First, the screener can only use information that is tangible and known. It won’t take into account that Company X is relying on future revenues from one new product to make or break the company, or that Company Z is about to be hit with a lawsuit that will dramatically impact profits. A screener is also limited by the quality of its database. If the information isn’t updated regularly to reflect changes in company conditions, the results will be flawed.
Finally, keep in mind that ratios and statistics can mean different things in different industries. For example, a price-to-earnings ratio of 25 may be high for a utility stock but low for a technology stock.
Despite their limitations, stock screeners are an excellent way to kick start your investment research. Spend a few minutes checking out a free screener, and discover how easy and fun doing your own research can be.