Filter

What Is a Filter?

In investing, a filter is a criterion used to narrow down the number of options to look over inside a given universe of securities. This process is additionally alluded to as screening securities; the terms "filter" and "screen" can subsequently be utilized equivalently in this unique circumstance.

Figuring out Filters

The specific filters utilized will depend on the strategy of the investor being referred to. For example, value investors will probably utilize factors connecting with the fundamental strengths of the company being referred to, for example, the strength of its balance sheet or the quality of its earnings. Technical analysts, then again, may be more inspired by factors connecting with its recent price history, for example, whether it is trading above or below its 200-day moving average.

For any investor, the filtering process typically begins with a general set of parameters intended to rule out companies that obviously don't fit the investor's style or objectives. For example, a North American investor who doesn't wish to trade in any foreign stocks could begin by filtering out all companies except those that are listed on American or Canadian stock exchanges.

When these overall parameters are put in place, the investor can then apply progressively specific filters with the goal that the excess companies closely match their picked investment strategy.

Screening Software

Utilizing filters to distinguish investment applicants has become essentially less troublesome in recent years due to the developing popularity and sophistication of online trading platforms. Today, there are several free and paid tools available that permit investors to filter stocks.

Example of a Filter

Emma is a value investor with an obviously defined investment strategy: she expects to purchase just Canadian and American dividend-paying companies that are trading at a price-to-book (P/B) ratio of something like 1.00. She has $30,000 to invest and is hoping to make a portfolio of 30 holdings, dispensing $1,000 for every investment.

To begin her pursuit, she utilizes an online stock screening software tool to dispose of all companies that are not traded in Canada or the United States. This produces a tremendous rundown of companies, so she adds an extra factor to additionally refine her outcomes: filtering out all companies that don't offer a dividend yield of no less than 1%. The subsequent rundown of 1,500 is greatly diminished, but still far bigger than the 30 companies she is searching for.

As a next step, she adds her P/B filter, removing all companies with a ratio greater than 1.00. This further decreases the rundown, leaving about 250 applicants.

As of now, Emma reasons there are two different ways she could proceed. One is by adding extra filters until the number is diminished to approach her 30-applicant cutoff level. The other is by positioning the 250 competitors in terms of one of her factors, or in terms of an extra factor.

She chooses to choose her 30 investments from among her existing rundown of 250, by positioning them in terms of their P/B ratios and choosing the 30 up-and-comers with the least ratios. This produces a portfolio of 30 investments wherein the average P/B ratio is 0.40 and the average dividend yield is 9%.

Features

• Filters permit investors to choose investments from a rundown of pre-customized up-and-comers, saving critical time.
• Investors will utilize various types of filters, depending on their investment strategy.
• A filter is a criterion used to narrow down, or "screen," investment up-and-comers.