I'm not an electronics guy, so I'm not sure of the difference. I just want it to work and was hoping someone could recommend a component that would work. Can you recommend a component?
Do you mean magnetic sensor or inductive?
I'm thinking his sounds easier then it is because there are a lot of details that I may not know but it sounds inexpensive. I'm not sure exactly how to go about making it and not sure how to hook it up to the Arduino. Any suggestions? or can you post a link to a similar project?
Yes it is possible to do with several different methods. One would be a "reluctance" sensor where you put a coil around a permanent magnet. Then when a magnetic object (like your steel screw) passes across the end, a pulse is generated in the coil. This pulse can be easily detected by Arduino.
You might want to put two steel screws opposite each other to maintain balance.