Paper Example on Stock Screening

Stock screening is the process used by investors when finding stocks that meet their criteria. The process aims at finding firms that match a particular financial profile. Investors consider factors such as market cap, balance sheet ratios and price when screening the stocks. Moreover, stock screening may involve finding firms that have met the certain predetermined technical threshold. Furthermore, investors can use stock screening to determine companies that trade in narrow ranges and have achieved particular levels with technical indicators like stochastic, RSI and ADX (Abdul Rahman, Azlan Yahya & Herry Mohd Nasir, 2010). However, stock screening does not infer that stock will change to an anticipated direction. Instead, it only shows that a stock can meet specific criteria set by the investor carrying out the stock screening. Today, stock screening is carried out using a computer which provides stock screening software tools.

Criteria of Stock Screening

Investors need to consider the governance of a company before deciding to invest in a particular firm. For instance, if the top CEO has a share of the company, it limits the opportunities to influence any decision by all means. Moreover, if an investor decides to invest in a firm where top officials have a small portion of share ideas, they are pressured by the corporate incumbents to make certain decisions that favor them. If the officials do not conform to the wishes of those members, they may be fired from the firm (Sevastjanov & Dymova, 2009). Thus, investors need to consider other governance factors such as executive compensation, staggered boards, shareowner rights, majority voting among others. Furthermore, investors should consider the political stability of the country which he intends to invest in. Political instability may have adverse effects on a given company. This is because it leads to a frequent change of policies thus causing a high rate of inflation. Companies which are located in political instability nations experience fewer revenues because there is no conducive environment to trade (Sevastjanov & Dymova, 2009). Thus, investors should consider the political climate of a country before deciding to invest.

Investors need to understand the environmental issues affecting a given company. They should understand how certain issues such as waste disposal, pollution, use of toxic chemicals, resource depletion and ecosystem change affect the company. An understanding of these factors would help an investor identify the environmental opportunities and risks that face the company (Sevastjanov & Dymova, 2009). Moreover, social factors such as child labor, human rights, indigenous rights, workers rights and community relations may also influence the public perception of the listed firm. Activities such as forced labor and violation of workers rights may adversely affect the reputation of a firm. The adverse effect may also affect the financial prospects of a company negatively because they depress the revenue. Therefore, investors need to understand the potential social risks of a company before deciding to invest it (Sevastjanov & Dymova, 2009). The listed companies should follow the government regulations. This is because government regulations affect the financial services of a company either positively or negatively. Therefore, companies should be able to establish external control management which helps implement the government regulations. This is because the implementation of these regulations may be expensive but act as a means of protecting investors finances in a company (Sevastjanov & Dymova, 2009).

Procedure of Stock Screening

An investor should follow a given procedure to select the company with the best criteria. First, an in investor conduct the broadest view of the different firms. Investors should consider companies that have compelling drivers of growth and those that have room for improvement (Chang et al., 2009). Moreover, the need to choose a theme which will help them create a smaller universe of stocks. Secondly, after selecting the theme, investors should consider the statistics of the given company. They need to evaluate the market capitalization before classifying the firms to either large, micro, mid or small capitalization. Furthermore, an investor should identify the potential list of firms after market capitalization before reviewing their characteristics. An investor may consider characteristics such as product lifecycle, level of sales, earnings, financial position and stock valuation (Chang et al., 2009). Thirdly, investors should construct a screen. Investors can either use software packages or brokerage firms when constructing a screen. The screen should consider the investment goals, tax implications, time horizons and risk tolerance (Chang et al., 2009). Lastly, investors should narrow the output. Narrowing the list of the firms may involve further scrutiny of the given companies by evaluating the personal and social concerns. The investor is then required to decide on which company to invest in after the procedure.

In conclusion, stock screening is essential because it helps an investor select a company which meets the criteria of his stocks. Investors need to consider factors such as government regulations, environmental issues, social and political impacts before choosing a company.

References

Abdul Rahman, A., Azlan Yahya, M., & Herry Mohd Nasir, M. (2010). Islamic norms for stock screening: A comparison between the Kuala Lumpur stock exchange Islamic index and the dow jones Islamic market index. International Journal of Islamic and Middle Eastern Finance and Management, 3(3), 228-240.

Chang, P. C., Liu, C. H., Lin, J. L., Fan, C. Y., & Ng, C. S. (2009). A neural network with a case based dynamic window for stock trading prediction. Expert Systems with Applications, 36(3), 6889-6898.

Sevastjanov, P., & Dymova, L. (2009). Stock screening with the use of multiple criteria decision making and optimization. Omega, 37(3), 659-671.