What Is the Meaning of Stock Screening?
Stock screening is a popular way of searching for stocks based on pre-determined criteria. A stock screener is a free software program that allows you to set parameters and then search for stocks that meet them.
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Stock Screening Parameters
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Stock screening parameters can roughly be grouped into three categories: descriptive, fundamental and technical. The boundaries between the categories are not well-defined. Descriptive parameters simply limit the search to a certain range: price, dividend yield, capitalization. Fundamental parameters identify stocks in a particular sector or industry group, as well as by valuation and ratios, such as price to earnings ratio (P/E) or return on equity. Technical parameters help find stocks based on the recent price action, such as 52-week highs or stocks that are up the most in a given period. Some screeners go a step further and allow you to search for stocks based on specific chart patterns, such as "cup with handle" or "triangle."
Example
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You hear that solar stocks are hot and decide to invest in them. You can use a screener to identify all stocks in the solar sector, within a certain price range, with a P/E not to exceed 20, whose price has risen the most in the past 12 or six months.
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Tweaking Screening Parameters to Refine Your Search
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Some sectors and industry groups have only a handful of stocks; others contain dozens, if not hundreds. If your search returns too many stocks, you may try to reduce the list by tweaking or tightening the search parameters. For example, you may raise your minimum price from $5 to $10 per share or limit your P/E to 15 instead of 20. Screening for stocks is a preliminary first step in your research. No stock screener is perfect, so each new search may require a little experimentation.
Word of Caution
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On the other hand, no stock is ideal; no stock can possibly meet all the parameters. You may know the characteristics of the winning stocks but if you input them all into a search, it may return zero results because combined, these parameters are too stringent. The art of stock picking is in knowing what parameters to give more weight to when, and what parameters to overlook or discount.
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