The great investors all use a disciplined and consistent approach to overcome the pitfalls associated with emotional decision making. They require that their investments pass strict criteria before they are considered for purchase. Warren Buffet favors companies with returns on equity above 15%, while Peter Lynch favors companies with price-to-earnings ratio relative to earnings growth equal to or less than 1. A stock screener can be used to create a systematic approach to investing.

A screener allows you to quickly sort through the universe of stocks to identify companies that pass your strict criteria. For example, if you are a conservative investor you may want the companies in your portfolio to have positive earnings and to pay a dividend. You may also want the companies to have a price-to-earnings ratio less than 30 to reduce the risk of buying overvalued stocks. Finding stocks that meet these requirements is simple when using a stock screener. Just enter your criteria and within seconds you will have a list of potential candidates. However, it is important to understand that while screening is a great tool, further research should be done before making buy or sell decisions. Using a stock screener will save you time by eliminating companies that do not meet your investment criteria. That is why stock screening is an essential research tool used by many investment professionals.

These companies possess a particular characteristic and share similar qualities and are the ones that warrant further analysis. Screening provides you with a framework to investigate certain companies in an organized and consistent fashion. Jumping in and out of investments without a game plan or a specific set of rules to aid in your decision making is a sure fire way of losing money over the long term.

Why Use a Stock Screener to Select Stocks?

Many people ask why they should use a stock screener. Well the first answer is quite simple: there are thousands of stocks out there and you need a quick, consistent and reliable way to find the winners. The more counterintuitive answer is that the conventional methods for selecting stocks are far inferior. Most people get investing ideas from several sources: 1) stock tips 2) brokerage recommendations 3) stocks featured on TV, and 4) companies written about in the paper. The problem with gathering ideas from several sources is that you don’t know whether these sources are actually valuable in helping you pick stocks that will do as well, or outperform the market. Most of the pros underperform the market using all of the same sources of information that is available to the average investor. But they are considerably more skilled and knowledgeable at using information for actual trading. Even the most skeptical academics concede that simple screening rules like buying low Price to Earnings stocks, or smaller companies, will beat the market if they are applied consistently. Practitioners have uncovered numerous other fundamental or technical characteristics like momentum and earnings-growth that help them easily identify future winners. So if you want to find these stocks, you need a screener to identify which ones have the characteristics that you are looking for.

Even if you don’t use a screener now, you probably do your own version of ‘screening’ one way or another. Maybe you hear that a stock has a certain Growth Rate, or P/E Ratio or Debt levels, or Return on Equity. Often listening to portfolio managers or financial commentators discussing these ratios will influence your judgment about whether the stock is good or not. For example, a high growth rate is considered good, having a lot of debt is considered bad, and having this information can bias your decision. If you are uncomfortable with holding stocks with certain qualities like high debt levels, you should use a screener to eliminate the stocks that you will not like. It will make your research a lot quicker and more efficient. Screening isn’t difficult but it does take some thought to set it up the first time around. For further information it is suggested that you read our article on How to Use a Screener.