Stock screening is the process of searching for stocks that meet certain predetermined investment and financial criteria. A stock screener has three components: a database of companies, a set of variables and a screening engine that finds the companies satisfying those variables to generate a list of matches. Automatic screens query a stock database to select and rank stocks according to user-specified (or pre-specified) criteria. Technical screens search for stocks based on patterns in price or volume. Fundamental screens focus on sales, profits, and other business factors of the underlying companies. By focusing on the measurable factors affecting a stock’s price, stock screeners help users perform quantitative analysis. Screening focuses on tangible variables such as market capitalization, revenue, volatility and profit margins, as well as performance ratios such as the PE ratio or debt-to-equity ratio. For example, an investor may want to do a search using a screen for all those companies that have a price/earnings ratio of less than 10, an earnings growth rate of more than 15%, and a dividend yield of more than 4%.
Many Investors take advantage of software programs or online subscription services that allow them to select stocks based on a customized set of conditions and variables. Some examples of various types of stock screening services are:
- Detailed screening using multiple factors and predefined screens. The service rates over 5,000 publicly traded companies on a 10-point scale, using an advanced mathematical system to determine a stock’s expected risk and return. It compares the fundamental and technical qualities of stocks to measures that have proven statistically predictive of stock performance in the past. It then assigns an expected six-month return to each stock based on this statistical profile and balances that return against expected volatility. The ratio of expected return (weighted-average most likely outcome) to expected volatility, or risk, yields the stock’s final overall rating. Ratings are displayed on a bell curve, meaning there will be fewer 1-10 ratings and far more of 4-7 ratings
- Screening using multiple factors and predefined screens. Utilizing nearly twenty predetermined screens covering an array of investment strategies, including strong forecasted growth, large-capvalue, small-cap growth, and Dogs of the Dow. It also provides a large number of Stock Price Variables which are particularly suitable for day traders.
- A screening service that covers a range of trading strategies and also includes a search based on Morningstar stock ratings. By searching stocks according to these ratings, investors are accessing analyst research on the company’s quality. One variable is minimum capitalization: one of six different values is selected by the user as the smallest market cap desired in the search results.