By Jacob Maslow — Branded Content
The science of stock screening has been around for more than a century, even since there were large, centralized exchanges where people could buy and sell corporate ownership shares. Indeed, some of the most effective screening methods are as old as the hills, but they are ever-popular because they give investors peace of mind. None of the methods listed below guarantees that you’ll screen out faulty, weak companies and screen in the best ones.
However, logic can be the best guide when you examine the reasoning behind each of the techniques. For millions of active traders and investors, it’s helpful to combine several of the strategies. Here’s the general philosophy behind each of the four major screening systems.
P/E ratio, or price-per-earnings ratio, as a way of identifying financially strong companies is one of the simplest and most favored selection tools. There are two steps to calculating the number. First, find earnings-per-share by dividing the company’s earnings by the number of outstanding shares. Then, divide the share price (P) by the earnings-per-share (E). If the number is below 15, it’s said that the stock is a good buy. P/E ratios above 15 indicate an issue that is too expensive and thus does not represent a wise investment.
The most accessible screening tool of all asks a question: “is the share priced below $5?” If the answer is yes, then it’s classified as a penny stock and comes with all sorts of unique features, some positive and some negative. However, some traders only deal in this segment, while others avoid it. So many active investors opt of penny-shares because you don’t need a ton of capital to get started.
Here’s an example of using two tools at the same time. Look at a list of companies you’re thinking about investing in. Assume there are 250 corporate names on the roster. First, you might decide to eliminate all the non-penny offerings, and end up with (again, just as an example) 50 company names remaining. Next, you’d eliminate all the ones whose P/E ratio is above 15. Perhaps that would leave you with ten or so candidates, from which you could further screen or opt to purchase all of them.
The internet makes a news-search easy. Find all recent news stories on any corporation you have on your might buy list. Look for negative and positive news from within the past six months or an entire year. There are no hard-and-fast rules with this technique, but once you’re finished reading, you’ll have an excellent feel for how the organization is doing in terms of overall performance, profits, and prospects.
Charts come in handy for research, and you’ll need them to find the price trend of the shares that interest you. This screen involves eliminating any company that is not in a current up-trend, defined by the 50-day moving average above the 200-day moving average. This simple method is often used as an initial screen by long-term investors.
Photo Courtesy of Jacob Maslow // Cosmic Press