Investing Basics: What You Need to Know About Stock Screening

Wednesday, Feb 01 2012 by
Investing Basics What You Need to Know About Stock Screening

While savvy investors may argue all day about which trading strategies work best, few would dispute that stock screening is a useful tool when it comes to getting an initial fix on a basket of potential investment candidates. 

When celebrated investor Benjamin Graham began penning his investment philosophy back in the 1930s, his teaching went on to inspire generations of investors. But without a great deal of time and good quality data, the ability to mirror quantitative value strategies like those of Graham or John Neff has remained beyond the reach of most private investors. 

It is only with the relatively recent emergence of accessible data and computers to work through it that a new world of insight & analysis has been available to the investing masses. No longer do you need to rely on hearsay - or the potentially biased recommendation of analysts - to generate stock ideas. While screening is not entirely new – some fund managers and academics have been doing it for decades – retail investors now have the chance to input their own pre-defined financial criteria and quickly identify which companies in the market are meeting them. Screening also allows investors to implement much more of a checklist-based approach to investing which, as discussed, can be effective in correcting the behavioural biases we all tend to suffer from when we’re investing. 

Trade Your Way

Screening means that investors can take important ratios and parameters such as the P/E, market cap, revenues, profits and margins (plus a great deal more), and compare companies across the whole market or a given sector at a glance. By amending the parameters, a basket of potential stocks can be produced that may suit an individual’s trading strategy and risk profile. For those in search of ideas and inspiration, screening also provides the chance to replicate the financial criteria used by some of the world’s most successful investors to see which companies might theoretically be of interest to them. 

For instance, for those with an interest in seeking out value stocks that might be poised to outperform the market, the F-Score approach espoused by Joseph Piotroski, a celebrated accounting professor at the Stanford Graduate School of Business, might be worth a look. The problem is that Piotroski judged each stock against nine accounting-based criteria, spanning profitability, leverage, liquidity, funding and efficiency. That’s…

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About Ben Hobson

Ben Hobson


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