Faults and Limitations of Stock Screeners

Stock screeners are modern innovations that allow an investor to search for a stock based on certain criteria through the use of a computer matrix. Prior to the development of computers, investors, analysts and brokers alike had to manually search for stocks that fit their criteria. Today, they simply use one of the many stock screeners available, including those on common search engines, in order to put together a list of investments that my be interested in following or purchasing. However, the new developments receive some criticism.

Potential Bias

There is a nearly limitless supply of stock screeners on the market today. For example, Yahoo!, CNBC, Morningstar, MSN and AOL all offer stock screening tools. Most are free and easily accessible through any Internet portal. However, if an investor were to type in the same criteria to each of these stock screeners, the investor may be surprised to find different resulting lists. The reason? Potential bias on behalf of the screener's programmers. For example, the programmers at AOL may ensure that Time Warner stock, that of its parent company, appears at the top of a list of telecommunication stock. It can do this by giving its own stock a higher weight than stock from its competitors.

Necessity for Specific Criteria

With modern day screeners, every stock available on every exchange can easily be added to the overall stock matrix. This gives an investor, or broker, far too many selections. In order to limit the selections, the user must know exactly what they want. This can require inputting five or six specific criteria simply to limit the search results to below 100. Very few novice investors are certain of this large number of criteria. They are more likely to have two or three wishes, which could result in far too many options to make an educated decision.

Invalid Comparisons

Some investors may find that a computer's stock screener simply lacks the ability to reason. For example, an investor may be inputting criteria independent of a stock's price. The screener could be attempting to provide a comparison between a $.15 stock and a $25 stock in order to generate a result. The process for analyzing the potential gains of these two stocks can be very different, but the computer applies the same screen. A "pen and paper" analyst would be better able to reason based on their knowledge of the investor's goals.

Fast Movement

Another problem with a stock screener is the chance that a large number of people are using the same screener to search for similar stocks. This may seem like a low probability event, but in reality, due to the sheer number of investors that use the Internet, it is a very common event. When the screener presents the same 20 stocks to hundreds of users for selection, they may all act in a relatively narrow window. The result is an abrupt change in the stock's price and, therefore, value. Many stock screen users find their "discoveries" have been discovered a thousand times over by the time their trade is executed.

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