Stock Screener: Definition, Example and Advantages

Key Highlights

• A stock screener is a tool used by traders and investors to choose stocks based on specific search parameters.

• It may be used to filter companies according to a number of criteria, including price, debt-to-equity ratio, dividend ratio, market size, and P/E ratio.

• Investors can save time and effort by easily selecting stocks as per their investment strategies.

• Stock screeners have some limitations also. The need for specific criteria and focus on quantitative parameters are the major ones.

What is a Stock Screener?

A stock screener is a tool that helps investors and traders to separate stocks according to specific parameters. It gives users the option to choose trading instruments that fit any set of requirements or profile. Stock screeners are available for free or at a certain subscription from well-known websites and trading platforms.

Using a stock screener, investors can identify stocks with strong long-term performance. Traders may also use it to determine opportunities for short positions. A stock screener may be used to sort companies according to a number of criteria, including price, debt-to-equity ratio, dividend ratio, market size, and P/E ratio. The number of stocks displayed decreases as you apply additional filters.

National exchanges now list the stocks of several thousand firms. As a result, picking and monitoring a quality stock is challenging. Stock screeners make it easy to focus on stocks that fit into your investment strategy.

An Example of Using Stock Screener

Suppose you wish to invest in Indian stocks only. You can use any Indian stock screener for this. You can select “India” from the drop-down menu to enter the country. In this way you can find all the stocks listed in Indian stock exchanges. You may also choose certain industries to invest in. These may include banking, textiles, hotels, and the automotive industry. So, choose those sectors on the screener.

Now, let’s say your current target price is Rs. 50/share or less. In that case, you have to choose stocks priced below Rs. 50. Moreover, if you also want stocks that have a dividend yield of at least 7%. So, enter this criteria also. You shall get a filtered list of companies from your preferred industries that are priced at Rs. 50 or less. The list will only include stocks with a dividend yield of at least 7%.

How do Stock Screeners Work?

The different factors that investors use to assess companies using technical and fundamental analysis are the basis for the stock screener. For instance, certain investors like to buy stocks that are near their 52-week low in price. To drastically reduce risk exposure, some investors might want to purchase a large-cap company's shares. Investors use a number of elements to make an ideal investment plan. They match it with a company's fundamental and technical indicators. They invest as per the results obtained.

With the help of the shares screener, investors may quickly evaluate a variety of stocks. This helps them find out which stocks suit their investment plan. The following three components are present in a stock screener.

1. A computerised screening tool that produces a list of companies that match the entered criteria.
2. A database including all the listed companies on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
3. Different variables that are used in the fundamental and technical analysis.

Investors who have a defined set of variables can use the stock screener by visiting the stockbroker's website. Investors must choose all the factors. This includes the industry, P/E ratio, debt-to-asset ratio, revenue, volatility, profit margins, etc. After entering all the variables, the shares screener will provide a list of stocks that match the criteria. You can further examine them to choose the best ones.

Key Considerations for Using a Stock Screener

You should keep the following things in mind before using stock screeners.

• It's crucial to understand the fundamental and technical indicators that have a direct impact on company share prices before using a stock screener.

• When utilising the shares screener, you have to construct an investing strategy with a set of variables.

• Investors need to be aware that these screeners exclude information about any unfavourable external news. They only select stocks based on quantitative criteria. Before utilising the screener data for investment purposes, you must research thoroughly.

• Investors should ensure that the stock screener is updated in real time with relevant information. The information should also mention the addition or removal of a delisted business.

Benefits of Using Stock Screeners

Investing in the stock market can be challenging if you lack an understanding of fundamental analysis and technical indicators. They impact the price of a stock in real time. However, before choosing stocks, you should learn the basics. It takes a lot of effort to manually check if a stock suits your investing plan. This is because there are thousands of listed firms in India.

A stock screener offers a useful method for investors to filter thousands of stocks automatically. You just have to enter the desired criteria. Investors may make more informed decisions by using the real-time list of stocks that meet the specified factors. Using the screener also ensures that you may save both time and money.

Limitations of a Stock Screener

The following are some drawbacks of stock screeners.

1. Requires specific criteria: Almost all the stocks are present in a stock screener. As a result, it becomes overcrowded. Therefore, users should specify the criteria carefully for specific results. To reduce the number of results below 100, they might need to enter more than six unique search criteria. Many investors enter two or three criteria, which gives several search results. This makes it difficult to decide.

2. Only quantitative comparison: For choosing stocks, most stock screeners use quantitative parameters only. However, the qualitative factors should also be taken into account. These include issues with labour or company operations, corporate governance, consumer satisfaction, and ongoing litigations.

3. Inappropriate Comparisons: A market stock screener may not appear useful to some investors. For instance, a user may have entered a search parameter that does not depend on stock price. To get a result, the stock screener can attempt to compare stocks according to their prices.

Conclusion

Stock screeners are a valuable tool for investors. They simplify the process of selecting stocks that match their investment strategies. Individuals can filter stocks based on specific criteria. You can enter various parameters to sort the stocks instantly. So, it saves a lot of time and effort. However, investors should note that they should have a good understanding of fundamental and technical analysis. This will help them to make more appropriate decisions. Moreover, stock screeners have certain limitations. They require precise criteria to work. In addition, they only focus on the quantitative parameters. Hence, investors should also consider the qualitative aspect of stocks for more comprehensive results.