Screening stocks? First, check the screen

If you’re looking for some promising stocks, consider using free online screening tools. You simply set some parameters describing what you’re looking for (for example: rapid growth, high profit margins, hefty dividend yield, etc.), and then click a “Search” button. Here are some advantages of screening:

• It reduces a large field of companies to a smaller, more manageable group. You can’t do the due diligence necessary on every stock you come across, so it’s useful to focus your attention on those that most closely fit your investing preferences.

• It helps you discover intriguing companies you may not have otherwise noticed.

• It helps you avoid wasting time on companies that don’t meet some of your basic criteria.

• It can help you think more clearly about your investing style, as it forces you to develop and hone your parameters.

However, there are some things to keep in mind:

• Screening should be just a first step. You still need to research your candidates, to dig deeper and make sure you’ve found actual gold and not pyrite.

• Screening is dependent on the accuracy of the underlying data. Even “good” numbers can be problematic, because accounting rules permit manipulation of earnings, revenues and other measures.

• Screening is limited mainly to quantitative factors. You’ll have to evaluate management, brand strength, competitive position, industry characteristics and CEO hairstyles separately.

• If a great company meets four of your five criteria but misses the mark on one, it will be excluded from your results. So be flexible and tweak your settings when screening.

You’ll find some handy stock screeners at http://moneycentral.msn.com/investor /finder/customstocksdl.asp and http://screen.yahoo.com/stocks.html, among other places.

Ask the Fool

Q: Can I claim a tax loss on worthless stock if I don’t go through the trouble of selling the shares? — G.K., Maryville, Tenn.

A: You can, but it can take time to determine whether your stock qualifies as “worthless” according to IRS rules. It’s often simpler to close out your position in the shares by selling. If it’s difficult or not worth it to sell through your broker, you can sell the shares to a friend (or cousin, aunt or uncle) for pennies. (But not to a spouse, siblings, parents, grandparents or lineal descendants.) Here’s one way to do it:

(1) Get the actual stock certificates from your broker. (2) Formally sell the shares to the purchaser, with a check for payment and a bill of sale. (3) Sign over the stock certificate (on its back) to the purchaser. Have the signatures verified by your banker and/or a local stockbroker. (4) Send the certificate to the stock transfer agent. Explain that the shares have been sold, and ask her to cancel the old shares and issue a new certificate to the new owner.

Some brokerages will buy all your shares for a penny. They do it to help out their customers and because over time, some shares may actually end up worth more than the penny paid for them. For tax info and tips, visit www.irs.gov and www.fool.com/taxes.

Q: Where can I quickly learn about the world’s best investors? — S.R., Syracuse, N.Y.

A: Check out “Money Masters of Our Time” by John Train (HarperCollins, $16). It profiles the investing styles of 17 top investors, such as Warren Buffett, Peter Lynch, George Soros, John Templeton, Benjamin Graham and Philip Fisher, and they can teach you a lot.

My smartest investment

I retired in 1981 and had $43,000 to invest. I asked one of my golfing buddies who was a stockbroker (who, by the way, had never made me any money in the market) where I could invest it to get a reasonable return. He recommended investing in utilities. I did, and I have enjoyed excellent dividends for these many years and have more than tripled the value of my money. — G.P.B., Charleston, S.C.

The Fool Responds: It looks like your friend the broker did make you money in the market this time! Utilities used to be classic investments for retirees and others seeking stable income. In recent years, though, with deregulation and increased competition, they’ve been less stable as they try to grow more aggressively.

Still, they generally do make a lot of money from essential services that all of us need. Learn more about utilities first, though. For example, utilities tend to perform less well when interest rates rise, as they tend to borrow a lot of money.