Why stock screening is considered an essential investor tool?

One can enjoy three notable benefits from stock screening, which are identifying new investment opportunities, elimination of behavioral biases from stock selection procedure and saving precious time.

What is stock screening all about?

Earnings screener or stock screening is considered to be a tool which can be put to good use by investors to filter stock database in huge numbers into manageable stock list to qualify further analysis. The screening tools may be availed in downloadable software form or as web enabled ones. Investors can also come across free screeners including the expensive more advanced programs to fit their specific requirements.

Stock selection can be a tedious and difficult process, while stock screening programs is likely to assist in the following ways:

investor tool

•         Save precious time.

•         Eliminate behavioral and emotional biases from investment decision making procedure.

•        To uncover investments not known before.

How stock screeners can help save time?

Stocks are present in thousands in the market. Generally stock screening databases include subset of the same. The data set, depending upon database might include 100s to 1000s of stocks. Hence, investors may find it tough to analyze them. Also, it will take a good amount of time and energy to go through the ratios, financial statements, future and historical growth prospects and multiples of each company.

Once the desired metrics to be placed within the stock screen are determined, screener is able to filter out stocks which produces stock list and meet specific criteria. Stringent the screening criteria, lesser stocks are likely to pass through the screen. When taking into consideration undervalued stocks, for example, stocks having P/E (price to earnings) ratio below specific level might be searched for. In case, the person is more concerned with development and less concerned with valuation, then stocks having high level of year to year earnings growth should be identified.

How behavioral biases are eliminated by stock screeners?

It is a natural tendency for investors to come up with unwise investing decisions, which are termed as ‘behavioral biases’. At times, it can be tough to identify and avoid. Such biases are only likely to lead the investors to take up illogical investment decisions that will hurt returns with time. For example, investors change their strategy very frequently to ensure fitting in certain stocks. With effective and efficient stock screening, it becomes possible to eliminate such biases and assist investors to stay objective. The stock screener is not in a position to save the person completely from behavioral biases.

How new investment options are revealed by stock screeners?

Stock offering does offer various benefits of which this is a major one. It has the ability to identify potential investments, which the investor might not have considered before. In case, there are 7,000 stocks in the screening database, then some stocks are likely to be included in it, something that the investors were unfamiliar with before. It is quite natural for investors to overlook less familiar stocks and hence, these get undervalued in the current market. Hence, those using an effective and reliable stock screening program are sure to be presented with sufficient opportunities.