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How to Use Stock Screeners for Penny Stocks

Stock screeners are automated online tools that find stocks that meet criteria that you set. Specifically, they refine the thousands of potential penny stock investments down to hundreds, or even a few dozen, or one, based on your search parameters. Stock screens are invaluable tools for any investor.

Screeners do all that work for you, and the results they spit out are quick and flawless. When you decide on a parameter, for example shares between two and three dollars, the screener eliminates every other stock and only produces those shares that meet your criteria.

You can access many free online stock screeners through the major financial websites such as Google Finance and Yahoo! Finance, and many stockbrokers provide them as well. If you don’t mind paying a small fee, you can access stock screeners with even more advanced features, such as screening by technical analysis indicators or chart patterns; check out the stock picker tool on Stockwatch and the screener provided through StockFetcher.

Stock screeners do have limitations, though. A screener can assess and sort only by data available about the shares of a company, such as the price, the market, and the industry group. Screeners can’t sort or eliminate shares based on anything other than data directly related to the stock itself. Anything to do with the underlying companies, or their operations or prospects, is beyond the scope of the screener.

Given their great value yet significant shortcomings, think of stock screeners as wonderful tools to use in the first step of your analysis. To trade penny stocks well, you still need to properly analyze companies that your stock screener produces.

You need to decide which criteria to screen for based on the options available on the particular tool you’re using. Here’s a rundown of the types of search criteria most screeners offer:

  • Price: Stock price is the easiest method by which to screen companies.

  • Market: Filtering out stocks based on the exchange they trade on is the best way to eliminate most low-quality penny stocks in one quick click. With this screen alone, you can dramatically improve your odds of finding winning companies.

  • Industry: A great way to screen companies is by industry, especially if you know a lot about a particular market or have reason to be optimistic about it. Screening by industry will return far fewer results than if you base your parameters on price or market alone.

  • Price situation: Some screeners allow you to select companies based on the situation or activity of their shares. For example, you could choose any stocks making a new year-high in price. Several other price criteria may prove useful:

    • Percentage of high or low: You can focus on shares that are trading within a certain percentage of their year high or year low in price. An example of this is a screen for any stocks trading within 10 percent of their lowest share price for the previous 12 months.

    • Trading volume: You may have success screening for stocks that are seeing major increases in the buying and selling activity in their shares. For example, you could set your screen to include every company that is showing triple the average trading volume.

    • Volatility: Some screens can focus on stocks with certain levels of trading volatility in relation to the overall market. You may find success trading penny stocks that are twice as volatile as the overall market; or perhaps shares that are only one-fifth as volatile are more your speed.

    • Fundamentals: You can set screeners to return results only for stocks that demonstrate certain fundamental criteria. For example, you may choose to only see screened results of stocks that have a price to earnings (P/E) ratio of 12 or lower.

  • Company size: Screening by market capitalization is a great way to single out companies based on size. By setting a minimum size, you can also eliminate those businesses that are too small, such as penny stock companies that may pass your other screening parameters but may be worth only $100,000 in total and thus not be a wise investment choice.

With any particular screening criteria, you will significantly pare down the number of options. However, by combining numerous parameters — such as price, industry, and market capitalization — you can achieve even more refined outputs.

Try combining a price restriction within a percentage of the year high in price. For example, you may want to screen for all stocks priced between two and three dollars and that are within 10 percent of their highest price for the year. This will return low-priced shares that are enjoying strong price momentum and so, by extension, may enjoy solid stock growth to come.

Don’t be afraid to experiment until you feel satisfied with the results the tool produces. You can change your criteria or try numerous combinations.

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