A stereotype is a simplified conception or image with specific meaning, often held in common by people about another group. A racial or ethnic stereotype is a generalized representation of an ethnic group, composed of what are thought to be typical characteristics of members of the group. The use of these stereotypes is considered demeaning even when the characteristics might be considered positive because it tends to discount the importance and uniqueness of the individual.
But racial stereotyping goes beyond classifying people into groups. When a group is assigned a negative stereotype, individuals that exhibit more of the physical characteristics identified with that group suffer more discrimination. More on this is located here: http://amos.indiana.edu/library/scripts/stereotype.html
The exterior characteristics can sometimes create a bias towards one group without meaning to. People often will make stereotyped judgments based on others' Afrocentric facial features so automatically that even pointing out and asking them to avoid their bias still fails to stop them, says a study in December's Journal of Personality and Social Psychology. The rest of the article about unintended judgments can be read here: http://www.apa.org/monitor/jan05/stereotyping.html
Some researchers argue that negative racial stereotyping in contemporary America is fueled, in part, by the continuing association between race and poverty—an association that is exaggerated in the minds of most Americans. The article about this continues here: http://www.allacademic.com/meta/p_mla_apa_research_citation/1/0/8/1/0/p108105_index.html
I do think the easiest way to avoid stereotyping might be to stay away from constant generalizing. I noticed it really varies differently among different people; some will think jokes about race are extremely funny while others become incredibly offended. It's just better to understand that even those that hit the stereotype close will always have something different about them from someone else.