A stock screener is a tool that allows investors to filter and screen through thousands of companies and select stocks according to their preferences. In this blog, we will explore what a stock screener is, how it works, and why it is a useful tool for investors.
Researching and Analysing stocks is intensive and not many traders and investors have the time to sit down with a pen and paper and put in the effort.
Tools that automate this strenuous calculation make this process easy for traders.
When it comes to research and analysis tool for stocks, there is no one size fits all solution. Some solutions cater to everyone. Few cater to a niche set of investors with picky investment strategies.
Traders are always on the lookout for the next best and easy stock research and analysis tool with better capabilities that will disrupt existing tools and make existing processes more easier and help them make more informed investment decisions.
Investors in India have always been updated about any tool that simplifies market research for the past decade.
Types of Research:
Pen & Paper:
The investor calculates the ratio for each stock with a pen and paper with formulas and data.
Algorithmic Trading:
Algo Trading is a type of trading where computer algorithms are used to execute trades based on pre-determined instructions.
But some traders want a bit of both. They want to be in control of the trades that they want to execute but also want a tool to simplify calculations.
This is where Screener comes in.
Screener is a tool that investors and traders use to filter stocks based on specific criteria, such as market capitalization, price-to-earnings ratio, or dividend yield.
The screener helps to narrow down thousands of companies to a small group of companies that meet the investor’s or trader’s specific requirements.
While screeners may use algorithms to filter stocks based on specific criteria, they do not execute trades automatically like algo trading.
Instead, the investor or trader must manually review and analyze the stocks that the screener has identified as meeting their criteria, and then decide whether to buy or sell the stocks.
Stock Screening
Stock screening is the process of selecting stocks based on specific criteria such as market capitalization, price-to-earnings ratio (P/E ratio), return on equity (ROE), debt-to-equity ratio, current ratio, earnings per share (EPS), and dividend yield. A stock screener is a tool that allows investors to screen stocks based on these criteria and more.
A stock screener helps investors narrow down thousands of companies to a small group of companies that meet their criteria.
Investors just need to enter their criteria based on thousands of ratios that are available on the screener.
Whatever type of stocks an investor is interested in, they can think of a query and the screener will show them the companies that fulfill their requirements.
How Does a Stock Screener Work?
A stock screener usually has three components: a database of companies, a set of variables, and a screening engine that matches the former two components to produce results.
One can go on to the screener, enter the criteria of their preference, for example, market cap>100 million. The companies that fit the criteria are displayed. One can enter more than one variable. Multiple ratios can be added by using “AND” and “OR” if the screener supports these rules.
The trader can access hundreds of ratios with the screener.
In a query-based screener, the investor can run the query after keying in the input and this will list the various companies that fit the criteria.
The investor can then analyze the various alternatives listed and choose the most feasible one.
Few screeners provide a collection of stocks under various categories that a user can directly look into.
Benefits of Using a Stock Screener
Stock screeners provide various benefits to an investor/trader.
They are cost and time efficient, providing all the required information at one click.
Stock screener provide real-time updated information, tend to eliminate emotional biases and help investors make rational decisions.
With quantitative filters available, investors do not have to be well versed with advanced financial analysis.
Stock screeners can be used to scan and shortlist the winning stocks based on different filters.
Stock Screening Based on Investment Style
Investment style refers to the approach that an investor takes to invest in the stock market. Some investors prefer a growth-oriented approach, while others prefer a value-oriented approach. With a stock screener, investors can screen and shortlist stocks that meet their specific investment style. This allows them to focus their efforts on stocks that align with their investment objectives.
For fundamental analysis, stock screeners use ratios like ROE, P/E, EPS, debt to equity ratio, and dividends to select good stocks. Technical analysis-based stock screeners use different parameters like moving averages, relative strength index (RSI), and Bollinger bands to select the most feasible stocks.
Stock Screening for Stocks, ETFs, and Mutual Funds
Stock screeners are not limited to only stocks. They can also be used to filter out Exchange Traded Funds (ETFs) and mutual funds based on specific criteria like expense ratio, past performance, asset allocation, etc.
Screening for Stocks on Stock Exchanges
Stock screeners can be used to filter out stocks listed on different stock exchanges, like the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and others. This feature allows investors to select stocks based on their preference of stock exchange.
Stocks and ETFs
A stock screener is not just limited to stocks, but can also be used to screen ETFs. ETFs are exchange-traded funds that are traded on the stock exchange. An ETF is a basket of stocks that tracks an index. For example, an ETF that tracks the Nifty 50 index will have stocks from the Nifty 50 index. An investor can use a stock screener to screen ETFs based on their preferences.
Price to Earnings Ratio
One of the most commonly used criteria for screening stocks is the price-to-earnings (P/E) ratio. The P/E ratio is the ratio of the company’s stock price to its earnings per share (EPS). The P/E ratio is an important metric as it indicates how much an investor is willing to pay for each rupee of earnings.
A low P/E ratio indicates that the stock is undervalued and has a higher potential for growth. A high P/E ratio indicates that the stock is overvalued and may not have much room for growth. A stock screener can be used to screen for stocks with a low P/E ratio, indicating that they are undervalued and have a higher potential for growth.
Price to Earnings Ratio
Through a stock screener, investors can scan and shortlist the stocks that fit their investment style by applying various parameters that they choose while making an investment decision. Using a stock screener, investors can screen winning stocks based on different filters. Some of the filters that investors commonly use to screen winning stocks include EPS increasing for a period of 5 years, debt to equity less than 1, ROE > 15%, P/E ratio must be lower compared to competitors, and so on. These filters help investors identify stocks that have a higher potential of delivering returns over time. It is important to note that while a stock screener can be a powerful tool to shortlist stocks, it is only the first step in the investment process.
Real-Time Data
Stock screeners provide accessibility to real-time data on the market allows investors that help investors make informed investment decisions based on the latest information.
Mutual Funds
Mutual funds are a popular investment vehicle for investors who prefer a diversified portfolio of stocks. Stock screeners can help investors screen and shortlist mutual funds that meet their align with their investment objectives and preferences.
The Stock Exchange
Stock screener can help investors screen and shortlist stocks that are top gainers today that are listed on their preferred stock exchange. In India, some investors may trade on BSE and others on NSE. With a screener, the trader can filter the stocks in their preferred exchange with a single click and focus only on those stocks.
