7 Best Stock Screening Criteria to Use as a Beginner Trader

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A vast amount of stock information is available nowadays; thus, it is tough to analyze all of it while making investment decisions. There are thousands of stocks to analyze and deconstruct. However, stock screeners simplify this process by enabling investors to sift through vast piles of data and shortlist a manageable number of stocks, making investment decisions easy. These stock screening criteria enhance the probability of successful trades.

Most traders use stock screeners to identify stocks that match their pre-determined investment criteria. You can filter stocks based on factors such as industry type, price range, the average number of shares traded daily, etc. Selecting proper stock screening strategies is of primary importance in determining the success or failure of the trades or the profits or losses one generates.

Many newbie investors find it tough to understand the appropriate stock screener criteria out of the hundreds of available options. So, to help budding investors with this challenge, we have compiled some of the most crucial stock selection criteria that one can apply for their investment decisions.

What are Stock Screening Criteria?

Stock screening criteria are certain factors or indicators one uses to filter down stocks from many available options. By setting one or more pre-determined screening criteria, investors can quickly sort through the myriad of available stocks and exchange-traded funds, making their decision-making process more manageable and less time-consuming. Moreover, criteria can be both financial and non-financial, although most focus on the financial part.

What are Some of the Best Stock Screening Criteria for Beginners?

As beginners, selecting the right stock can often be overwhelming. You can apply the below-mentioned stock screening criteria in the filters, to enhance your decision-making process.

1. Sales and Earnings Growth

One of the best ways to assess a company’s performance is by studying how its revenues and earnings are growing compared to the market’s ongoing condition. For instance, to pick out the best stocks, investors can pick stocks that are growing their top and bottom lines by 15%. Such a threshold can be taken because many organizations consider this 15% growth as a reasonable performance benchmark. At times, companies that grow too fast find it challenging to maintain their growth pace and are likely to disappoint investors later. Still, a growing range of around 15% is quite doable.

2. Market Capitalization

Organizations with the largest market capitalization in the industry in which they operate or have the most prominent geographical presence, are considered safe investments. Such companies have proven the test of time and survived through the most challenging market conditions. Thus, investing in them will be the safest approach for a beginner investor. However, because these companies are the industry’s top dogs, they are usually much more expensive than their peers.

3. Price Earnings Ratio (P/E Ratio)

P/E ratio is a standard valuation indicator that represents a company’s share price to earnings per share. It is popularly used to determine whether a company is overvalued or undervalued. Although no specifics indicate whether a stock is overvalued or undervalued, stocks with a P/E ratio of 15 or less are usually considered undervalued. In contrast, those with a P/E ratio greater than 18 are considered more expensive. However, the fastest growing companies often have a higher P/E Ratio in the beginning, but as they mature, their P/E levels tend to fall steadily.

4. Debt to Equity Ratio (D/E Ratio)

The debt-to-equity ratio is commonly used to assess an organization’s level of risk or financial leverage. It denotes the proportion of a company’s assets financed by shareholders’ equity and debt. Most of the organization’s assets are usually debt-financed. The company relies heavily on external funds to leverage their finances if its D/E ratio is more than one. It is best to choose companies with lower debt levels because a company that is heavily in debt is more likely to go bankrupt in the future if unfavorable market conditions emerge.

5. Current Ratio

The current ratio, also called the liquidity ratio, is a financial health determinant because it depicts a company’s ability to pay back short-term obligations or debts due within one year. Beginners should avoid companies with much higher debt than current assets because a company with a lower debt level is often more sustainable. This can be inferred from the fact that such a company is not required to give out its fixed assets during turbulent times, allowing it to keep its operations almost entirely intact. In general, one should choose companies whose debt does not exceed 110% of the value of their net current assets.

6. Return on Investment (ROI)

Return on investment, popularly known as ROI, is the ratio between an organization’s net income and the amount of investment made and is usually used to evaluate the performance of any investment. If this performance ratio is high, it indicates the stock is performing well and that its profits outweigh its costs. An annual ROI of 7% or higher is generally considered a good ROI for a stock investment.

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7. Insider Buying Level

Insiders frequently purchasing a company’s shares indicate that it is undervalued because some senior executives often buy shares of a company to demonstrate their faith in it. As a result, it can be an excellent way to look for companies where several insiders are buying at or near the current market price, to profit in the long run.

Hundreds of stock screening criteria are available these days. Still, the abovementioned criteria are essential factors an investor should consider before framing their investment decisions.

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