A stock screener is a way to quickly filter through different stock choices. There a number of reasons to select stocks in broad sweeps instead of looking through every single possibility. The biggest reason is time. There is simply no way one person can follow every company in existence. Even if that person is only focused on trading penny stocks, the choices are very high with a plethora of new options appearing every year.
Just like when you created your investment plan, you’ll have to experiment with screening options in order to find the best combination for you. Here are some ideas to seed your experiments.
Fundamental Analysis
If you’re looking to find penny stocks that will grow to be big blue chips (or at least small caps) then you are likely a fundamental investor. As a fundamental investor there are some aspects of business that seems to hold true because the accounting just works. For example really high debt ratios cause bankruptcy, free cash flow improves safety; dividend paying companies have long term better returns, etc. You can use penny stock screens to filter out companies that you believe have no hope of surviving the long haul because of how that company runs their business. Since these ratios are often stored the filtering can be automated so you only look at stocks that matter to you, which can save you hours of your precious time. Top notch screeners will really dig into the financials to notice increased R&D or subtract one time charges.
Technical Analysis
Technical triggers can be used as filters for a penny stock screen. Filters that you can easily find are moving average crossovers, change in volume, change in price, change in spread, or even more exotic indicators like the Bollinger bands or Elliot wave theory.
While screeners can be incredibly helpful, you want to be careful that you don’t try to use the screener as an automated stock picking system. This is especially true with the volatility of penny stocks; you need to add your own due diligence to each specific situation. For example, perhaps you like to buy stocks that have a moving average cross over on rising volume. This would make a good screen for stocks, but if you just bought without looking you may pick up stocks that are simply “dead cat bounces”. With a little research you may discover these stocks are clearly going under, but the price is bouncing around a bit because of day traders.
Free or Paid
The internet provides an ample supply of both free and paid penny stock screeners. All of the major web networks like MSN, Google, and Yahoo have free screeners. Plus there are hundreds if not thousands of database screening sites for niche filtering.
Another option is screening newsletters or services. The price on these publications can range from dollars a month to thousands of dollars per month. Are any of them worth it? Sadly, the only way to know is to try them out. I recommend you don’t spend more than 0.5% of your total portfolio on investment advice. So if you have $25,000 in your penny stock account, don’t spend more than $125 per year on publications. Be wary of reviews online, but it doesn’t mean you should ignore them. Just stick with reviews from sites that have done you will in the past.
A stock screener is a tool to be used to narrow your search. When you are limited in time you need to quickly filter out penny stocks that have a low chance of success. When you put more effort into fewer good choices you should improve your win ratio. If you aren’t finding increased returns you need to alter your filter, change your research, or try another screening source.