Filter

DEFINITION of 'Filter'

A filter is any form of criteria used to determine financial vehicles that can help to achieve investment objectives or fit within a specific investing style. Also referred to as screening, a filtering process often starts with a general set of parameters to eliminate companies that do not fit the investment style or objectives of an investor or portfolio manager. As the process continues, increasingly specific filters can be applied to define the financial vehicles that most closely match the optimal parameters for investment.

BREAKING DOWN 'Filter'

Filters are often used first to narrow the choices for investment by eliminating the companies, indices or financial vehicles that do not meet the broadest criteria for investment. For example, the first filter used by a portfolio manager of a large-cap dividend fund might be a screen that eliminates all small- and mid-cap companies from consideration. The second filter could be used to segregate all large-cap equities that do not pay dividends. As filters get more specific, they can be divided into two categories.

Fundamental Filters

Valuation-based filtering processes typically focus on company fundamentals and the balance sheet, including free cash flow, revenues, earnings and debt-to-equity ratios. For example, the filters used by the manager of a large-cap dividend-paying fund might include a minimum for the current ratio of free cash flow to dividend payments, with the objective of subtracting companies from consideration that do not meet that benchmark.

A second filter could be implemented to subtract companies that fall below a benchmark for historic growth rates of free cash flow and dividend payments. In this type of process, portfolio managers continue to test companies against increasingly stringent filters until they make their final buying decisions.

Technical Filters

Growth managers are more likely to use technical filters as a means of determining the companies with the highest potential to deliver returns. For example, a top-down manager might start the screening process with a broad-based filter such as sectors trading above their 200-day moving average. After eliminating the sectors trading below the moving average, a manager might set a filter for companies in the remaining sectors trading above their 10-week moving average.

As the number of companies that meet the parameters of each sequential filter narrows, the manager could set specific filters to find the companies trading with the highest levels of momentum. For example, a filter could be set to screen for companies in established uptrends with increasing volume. Much like with the valuation-based screening process, a growth manager could create as many technical filters as necessary to determine the companies that best fit the style and objectives of the portfolio.

RELATED TERMS
  1. Filter Rule

    A trading strategy where technical analysts set rules for when ...
  2. Stock Screener

    A tool that investors and traders can use to filter stocks based ...
  3. Trading Strategy

    A set of objective rules designating the conditions that must ...
  4. Hodrick-Prescott (HP) Filter

    A data-smoothing technique that is commonly applied to remove ...
  5. Palisades Water Index

    A stock market index that gauges the performance of global water ...
  6. Investment Manager

    A person or organization that makes investments in portfolios ...
Related Articles
  1. Trading

    Pinpoint Winning Trade Entries With Filters And Triggers

    These tools will help you enter at high-probability points and ensure you trade within your set strategy.
  2. ETFs & Mutual Funds

    Master Futures Trading With Trend-Following Indicators

    The futures market is a lot less scary when these indicators are used to establish current trends.
  3. ETFs & Mutual Funds

    Surf's Up With Filtered Waves

    With an appropriate filter, you can ride the waters to rising profits.
  4. Trading

    How To Seek Out Winning Trades

    Hunt for new winners with carefully-drawn scanning filters and third party services.
  5. ETFs & Mutual Funds

    Finding the Right Mutual Fund Screener

    Learn about which filters should appear in a good mutual fund screener, and discover which factors are less important in finding an appropriate fund.
  6. ETFs & Mutual Funds

    4 Dividend ETFs to Help Fund Your Retirement

    Investing in stocks that pay out dividends can be a smart way to establish a reliable income stream in retirement. Here are four low-fee dividend ETFs.
  7. Trading

    4 Steps To Picking A Stock

    Narrow down the universe of stocks to find the ones that best suit your needs.
  8. Trading

    Traders: Work Less, Make More Money

    Cut down on homework by screening for stocks that tend to make large intraday moves.
  9. Investing

    Snapchat Files Patent For Recognizing Objects In Your Snaps

    The patent will help the company serve up custom ads based on the objects identified in your snaps.
  10. Managing Wealth

    How To Invest In Penny Stocks

    Penny stocks are highly speculative and very risky for many reasons, including their lack of liquidity and small market capitalization.
RELATED FAQS
  1. How do I find stocks developing ascending triangle patterns?

    Learn more about the types of computer programs and software packages that can help traders scan the market for specific ... Read Answer >>
  2. What are common advantages of investing in large cap stocks?

  3. How can a socially responsible investor gain exposure to the metals and mining sector?

    Read about social responsibility and the metals and mining sector, and how environmentally and culturally conscious investors ... Read Answer >>
  4. What factors cause investors to perceive large cap stocks as being low-risk?

    Learn the specific factors of large-cap stocks that create the perception among investors that investment in large caps carry ... Read Answer >>
  5. What is the difference between portfolio management and financial planning?

    Understand the difference between financial planning and portfolio management, and learn which financial professionals can ... Read Answer >>
  6. What are the best technical indicators to complement On-Balance Volume (OBV)?

    Discover why it is important to confirm the price trend signals generated from the on-balance volume indicator and which ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center