In the last article, my colleague told about the trading advisors and how to use them. Screening of stock — another interesting tool for those who work in the stock market, but in which cases it is used and how – is the question. But first let’s try to understand what it is and will talk about where to take screeners on the Internet. By the way, the brokers hardly speak about this tool.
What is the stock screening
Most professional investors believe that stock screening is a trap, which gives in most cases wrong signals. But I again focus attention on the fact that any tool in the hands of an inexperienced person can be a trap, then as a professional has the whole set of such tools. And a true professional is able to determine when and how to use a particular tool.
Stock screening is a filter that allows you to find securities on the specified parameters. In other words, it’s a search program that is linked with the base information, allowing to select only those papers that fit your request among the many securities of different companies. And well-set query that determines the performance of the tool. And of course after the selection of the list of securities they still need to be analyzed by other methods.
It might seem like it is possible to identify the most promising securities for some filters? But imagine that there is a bucket of coins in front of you in which you want to find some of the most valuable ones. Time searching for you is limited. It is likely that you will act in the following way:
- decide which coins are valuable for you. For example, 25 cents 1920-year and 5-cents 1935, year (conditionally);
- divide all the coins into piles according to their denomination (from having eliminated all but 25 and 5 cents);
- sort the coins by year;
- find the ones that interest you.
The same is true for stock screening. Program-screener allows you to quickly find a vast array of securities, those which can be interesting. However, for the Russian securities market is not particularly relevant for the simple reason that in Russia the securities market practically is not as such in comparison with Europe or the United States. So for those who are just starting to work with the American stock market, to understand the scenery will be invaluable.
Programs-screeners in any case do not replace other tools and does not preclude the use of the research or technical analysis. They are designed to save trader time and helping to organize the information in the stock market. If someone is proud to read a series of reports over the past 10 years and has studied the price movements in a long period, spending a few months, then is it really a reason for pride, when screening shares allows you to do it faster?
Disadvantages of stock screening:
- “garbage in, garbage out”. Data filtering is performed according to the information that is inherent in its basis. Work on this method to sluggish markets or venture projects is too risky;
- not suitable for volatile markets. Filtering is performed on the basis of historical data to say that trend will continue, it is impossible. But for the analysis of the previous periods, the tool will be very handy;
- if it is wrong to put filters, stock screening will show the relevant results. The more complex the filter, the less accurate it will produce results. You can set many items, the filter will indicate 3-5 companies, but none of them will be appropriate for investment option.
The advantages of stock screening stock:
- ability to allocate a separate group of securities according to specific criteria. The tool reduces the volume of the analyzed database;
- a simple tool that does not require mathematical knowledge for aggregate use with other analysis techniques;
- able to quickly track the historical price movements, to analyze changes of a certain group of stocks.
As in the case of advisers, there are filters for general purpose and there are scanners already with built-in settings appropriate for a certain purpose. For example, a scanner, developed for the investment strategy of Peter Lynch or scanner, which selects companies on the criteria that uses Warren Buffett.
Some examples of public filters to work with the American stock market:
- Yahoo! Finance Stock Screener;
- Financial Times Equity Screener;
- Google Finance Stock Screener;
- Finviz Screener.
We will not describe each one in details, they differ, and you will find the difference when you start working with them. By the way, for the Russian stock market there are also screeners, but it’s better to use more reliable international ones. Again, the question is how and for what purpose to use a tool. The knowledge of English is necessary.
Briefly I will show you how to work with the stock screener Google Finance Stock Screener. In the screener choose the Moscow stock exchange, but leave all of the industry. Screener finds 458 companies. The next filter is a column in the list of companies:
- Market cap — the market capitalization of the company (the larger the value, the larger the company);
- P/E ratio — the ratio of the value of shares to profit per share. A value that determines whether the stock price is inflated or not;
- Div yield — the annual dividends. Indicator of shareholder yields. However, if you set a value from 1% up to a maximum, there will be only 63 companies in the list. This means that other companies are either unprofitable, or dividends are not paid;
- Last Price — the last value of the stock.
When using such a filter in the stock markets of the USA, the list of companies would be significantly longer. Also, I would recommend to pay attention to such filters as:
- Stock Price — the value of the stock. Expensive shares are worth buying for investment, cheap with speculative aim;
- Average Volume — a measure of liquidity of the purchased asset. If the indicator is small, they are small illiquid stocks, they will be harder to sell. In the US, stocks with a daily trading volume of more than hundreds of thousands are recommended.
Summary: stocks screening is the ability to quickly get acquainted with the new market shares of a particular stock exchange. It is also a tool for market research, the basis for the decision, but not a guide to buying the asset. Try, learn, practice!