Getting started on stock investing can be daunting. The information age we live in today allows us access to so much ready data that may or may not be useful for our investment decisions.
If you were new to investing, it would be challenging to navigate through vast amount of information found on the Internet.
That is why it is recommended for all retail investors to use at least one stock screener to help them with their investment decisions. A stock screener helps you sieve through thousands of information at the click of a mouse, and potentially saves you the trouble of conducting hours of research.
What Is A Stock Screener?
As defined by Investopedia, a stock screener is a “tool that allows investors and traders to filter stocks based on user-defined metric.” Investors can select their requirements, and the screener would shortlist the stocks (if any) that meet the criteria.
In today’s article, we will be taking a step-by-step look on how you can use stock screeners to help you with your stocks selection. We will be using SGX StockFacts for the purpose of our illustration.
Step 1: Understand Your Investment Objectives
It is common for people to tell us that they “want to start investing in stocks”. However, all too often, whenever we probe further on the reasons for investing, we learnt that not many have thought through their investment objectives, aside from simply hoping to make money and become rich.
We have to stress the importance of knowing what your investment objectives are. This way, you will know what counters (i.e. stocks) are suitable for you. Are you investing for passive income in the form of dividend payout every year? In that case, you need companies with consistently strong cash flows.
If you are investing for future growth, you will want to seek out companies with great growth potential, despite them not paying out dividends or generating profits currently.
What could be a good investment for your friend or neighbour may not be a good investment for you. Some may have longer time horizon for their investments or can afford to take greater risk.
Don’t follow the investment objectives of others. Determine your own objectives.
Step 2: Use SGX StockFacts To Shortlist Stocks
After understanding your investment objectives, it is time to shortlist some stocks that could be suitable for your portfolio. A quick way to sieve through the suitability of these stocks would be to use a stock screener such as StockFacts.
You want to screen for suitable stocks based on your requirements, which should be derived from your investment objectives.
For example, if your objective is to build up a passive source of income, then you need companies with strong cash flow that pays out consistent dividends. Not only that, you also want to make sure they are profitable companies. Otherwise, where would the consistent dividends come from?
We decided to use two requirements on StockFacts to find out what are the possible dividend paying stocks available for us to invest in.
(1) Dividend yield of at least 4% per annum – For every $1,000 we invest, we want to get back $40 each year.
(2) Price-To-Earning Ratio no more than 15.0 – We are a little cheapskate; we do not want to pay a premium for the companies’ earning. A P/E ratio of 15.0 means we do not want to pay anything more than $15 per share for every $1 that the company is earning.
Based on the above criteria, we found 90 companies trading on SGX. However, that include companies that we do not know, or a large number Real Estate Investment Trusts (REITs), some of which derive their income from overseas.
Since there are so many stocks to choose from, we decided to add one more criteria – market capitalisation of at least $1 billion. This means we are only interested in investing in big companies. That shortens our list to just 24 companies, of which 16 are real estate related (no surprise there).
Among the non-real estate companies left on this list, we see household names such as M1, OCBC and Singapore Post Limited, which every Singaporean would know of. We also see other big companies such as Yangzijiang (ship building), and CWT (logistics) though these companies may not be as familiar to everyone unless you are already a stock investor.
Step 3: Gather More Information On These Companies
Within a few minutes, we have already identified some companies that might be suitable for our portfolio. Yet it would be silly for us to invest in these companies just because they meet some of the criteria.
Are these companies worth investing in? Or simply companies that somehow met the criteria set in place.
To know the companies better, we need to find out more about them. We need to conduct research, understand their past performance, and their future plans.
StockFacts allows you to gather the information with just one click.
From the screenshot above, we can gather the latest financial information, company related news, and all relevant information pertaining to one of our shortlisted companies, M1.
Important things to immediately look out for would be the consistency of the company’s dividend payout and profitability. We are not saying the rest of the information isn’t important but if we are going to invest in the company because of dividend and profitability, the least we could do is to make sure the company is constantly achieving these criteria.
The last thing we want is to be investing into a company that just happened to be profitable during the time we are looking at it.
The S&P Capital IQ Consensus is also helpful. It tells us the views of analysts who are covering the stock. While we don’t think you should fully rely on what these analysts are saying, it is worth asking yourself why if you have an opinion on the company that is vastly different from what all the experts are saying.
Step 4: Identify Possible Risks That The Company May Face
It is time for us to play the role of devil’s advocate. We refuse to accept that you can make an investment without taking some risk. If anyone tells you otherwise, then the person, be it your stockbroker, personal banker or insurance agent, isn’t telling you the truth. All investments involve some degree of risk. Even the money in your CPF account has a liquidity risk tied to it – you can’t take the money out when you want to.
If we agree with the notion that all investments assume some form of risk, then the question we need to ask ourselves prior to making an investment would be just what those risks are. When we invest in an OCBC or an M1 stock, what are the risks we will be exposed to?
Obviously we cannot go into every single risk detail, but here is a simplified way to confute the esteemed stocks you would otherwise be considering.
OCBC – What if Singapore goes into a recession? How will OCBC be affected? If interest rates start increasing and businesses and investments slow down in the region, would OCBC continue to be profitable? Will they be able to battle through tough time?
M1 – The company seems to be in a nice comfortable position but what happens when MyRepublic enters into the telecommunication space? Would the industry become more competitive? If MyRepublic starts pricing at a loss margin, would M1 need to do likewise to retain its existing customers?
It is important to question what those risks are so that you can continue to monitor these risk areas in the future, even after you have made your investments.
Step 5: Buy & Review
If you feel comfortable with the company even after understanding the risks that it is vulnerable to, then go ahead to invest in it. Thereafter, periodically review the stocks that are in your portfolio.
We don’t advocate that you sell a stock as soon as it is underperforming. However, you should check if the reasons for your original investment still hold. For example, if you are buying a stock for its dividends, and they start reducing their dividend payout due to profitability, then it is worth looking further into details if this problem will continue to develop.
A good rule of thumb is to review individual stocks once every 3 months, since companies announce their results every quarter. You should also review your entire portfolio, inclusive of bonds, cash, and insurance policies that you hold, at least once a year.
You can easily keep track of your stock portfolio with the help of SGX StockFacts. You can also use it to monitor other stocks that you may not have bought yet, but waiting for the right moment to enter.
This article was written in collaboration with SGX. All views expressed in the article are the independent opinion of DollarsAndSense.sg.