The
stock market offers several kinds of stocks with one of the most popular being penny
stocks. It is difficult to discuss all of the types of stocks in just
one article, but we will address several including penny stocks and small caps
as well as others.
The
type of stock an investor invests in depends on their risk tolerance. Some
investors prefer individual stocks, some prefer mutual funds. Some investors
prefer Dow stocks. Penny stocks can be risky and each investor has to decide on
their risk tolerance level.
Value stocks are a popular type of stock category for
investors to screen. Value stocks are those stocks that trade at a low price
relative to its fundamentals and considered undervalued by value investors.
Some characteristics of a value stocks include a low price-to-book ratio, high
dividend yield, and/or low price-to-earnings ratio. Fundamentals include
dividends, earnings, revenue, balance sheet items and other. Benjamin Graham
and David Dodd are credited with pioneering value investing. Value investing is
one type of stock investing for those looking for bargain stocks and cheap stocks.
Penny
stocks are common stocks that trade for less than $5.00 a share and
are traded over the counter (OTC) through quotation services such as the OTCBB
or the Pink Sheets. Penny stocks generally have market caps under $500M, trade
under $5.00 per share and are considered speculative, particularly those that
trade on low volumes over the counter. There are several stocks that trade on
the NASDAQ and AMEX that trade under the $5 level as well. Other terms to
describe a penny stock include nano caps, microcap stocks, and small caps.
Investors considering penny stocks have to evaluate their risk tolerance. Many
consider penny stocks risky and speculative.
Growth stocks are stocks that increase in value (earnings
growth, market capitalization, price) and yield a high return on equity, known
as ROE. To calculate ROE, divide the company’s net income by the company’s
equity. During some years growth stocks do well, in other years value stocks
perform better. Generally, for a stock to be in the growth stock category,
analysts expect to see at least 15 percent return on equity.
Small cap stocks are known popularly as small caps. These
stocks are a popular stock market segment for stock research by investors. Small
cap stocks are stocks of companies with a market capitalization of less than $1
billion. Microcap stocks are stock of companies with a market capitalization of
less than $250 million.
It is important to understand market capitalization. Most new
investors look at the stock price, but the important number to look at is market
cap. Market cap is a measurement of corporate or economic size. It is
calculated by multiplying the number of shares outstanding times the share
price of a public company.
Technology stocks
are generally traded on the NASDAQ exchange, but can be traded on several other
exchanges. There are several technology stock sectors including the Internet,
Cable & Satellite, Computers & Chips and others.