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 filter rule is a trading strategy in which technical analysts ...
  2. Equity Style Box

    An equity style box is a visual representation of the principle ...
  3. Trading Strategy

    A set of objective rules designating the conditions that must ...
  4. Investing Style

    Investing style is an overarching strategy or theory used by ...
  5. Investment Style

    Investment style is the method and philosophy followed by an ...
  6. Style Analysis

    Style analysis is the process of determining what type of investment ...
Related Articles
  1. Trading

    Pinpoint Entry Points With Filters and Triggers

    These tools will help you enter at high-probability points within your set strategy.
  2. Investing

    4 Steps To Picking A Stock

    Learn how to narrow down the universe of stocks with an investing theme that can be screened and analyzed to find the trades that best suit your needs.
  3. Trading

    How To Seek Out Winning Trades

    Hunt for new winners with carefully-drawn scanning filters and third party services.
  4. Financial Advisor

    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.
  5. Trading

    Traders: Work Less, Make More Money

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

    Top 3 ETF Dividend Plays (DHS, FVD)

    Pure equity growth and income funds look like the best bets for dividend investors.
  7. Investing

    Getting Started With Stock Screeners

    Learn how using stock screener tools makes finding good stocks easy by filtering a database for certain types of financial and performance criteria.
  8. Investing

    Valuing Large-Cap Stocks

    Investors seeking to preserve capital in volatile markets might want to consider large-cap stocks.
  9. Investing

    Analyzing Mutual Fund Risk

    Find out whether a fund's performance is a result of the manager's abilities, or just a fluke.
RELATED FAQS
  1. How can I use cash flow investing activities to determine if a company is growing?

    Learn how to use the sources and uses of a company's cash flow from investing activities to determine whether that company ... Read Answer >>
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center