Types of Stocks: Penny Stocks, Value Stocks, Growth Stocks etc.

There are several types of stocks in the stock market. We can not address all of them in this article, but we will address a few including penny stocks, value stocks, growth stocks and technology stocks.

A penny stock is a common stock that trades for less than $5 a share and are traded over the counter (OTC) through quotation services such as the OTCBB or the Pink Sheets. There are several stocks that trade on the NASDAQ and AMEX that trade under the $5 level as well. 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. Other terms used to describe a penny stock include microcap stocks, nano caps and small caps. Many consider penny stocks risky and speculative. Investors considering penny stocks have to evaluate their risk tolerance.

Value Stocks are those stocks that trade at a low price relative to its fundamentals and considered undervalued by a value investor. Fundamentals include dividends, earnings, revenue, balance sheet items and other. Some characteristics of a value stock include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio. Value stocks are created out of a market inefficiency creating a company that is trading for less than they are worth and thus creating value. Value investing was established by Benjamin Graham and David Dodd.

Growth stocks are stocks that appreciate in value and yield a high return on equity, known as ROE. To calculate ROE, divide the company’s net income by the company’s equity. As a rule of thumb, for a stock to be in the growth stock class, analysts expect to see at least 15 percent return on equity. During some years growth stocks do well, in other years value stocks perform better.

Several technology stocks are traded on the NASDAQ. Technology stocks are some of the more popular stocks in the market as investors see them as exciting investments. There are several technology stock sectors including the Internet, Cable & Satellite, Computers & Chips and others. Technology stocks were very popular in the late 1990’s. Today, technology stocks are still a highly covered segment of the stock market.

Small cap stocks, also known as small caps 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 one billion dollars. Microcap stocks are stock of companies with a market capitalization of less than $250 million. Both generally, have more risk than Blue Chip stocks represented by the Dow Jones Industrial Average. It is important to understand market capitalization. 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.