When you buy a share of stock, you become a part owner in a public company. When it comes to investing, this is often seen as the best way to join in on a company’s successes over time. But before you start buying shares, it’s important to understand what stocks are and how they work.

A company issues stock to raise money so it can grow. Investors who believe the company will prosper in the future buy the stock, gaining the right to vote at shareholder meetings and receive any dividends the company may distribute. Over the long term, this can lead to impressive gains in value. But over shorter periods, the value of a stock can fluctuate widely based on many factors, from speculation to the amount of shares being demanded or supplied by the market.

If you’re planning to invest in stocks, it’s smart to build a portfolio of multiple companies so that you have some diversification. That way, you’re less likely to be blindsided if a single company’s performance is a disappointment. You can also diversify by industry, which helps you avoid too much exposure to the risks of one particular sector. Finally, you can choose to diversify by geographic location. This way, you’re not too exposed to any potential disruptions in the world economy that could affect specific countries or regions.

The easiest way to buy and sell stocks is through a broker, who can manage your purchases and sales. But before you choose a broker, think about the type of investor you want to be and how much you’re willing to spend. It’s also a good idea to read up on what different types of investments are available, and how they differ from each other.

Some investors focus on valuation ratios, which are ways to judge a company’s value. This can help you figure out whether a company’s stock is fairly priced, but it’s important to remember that valuation ratios will vary between companies and industries. For example, the ratios that are useful for banks, such as price-to-book and price-to-sales, may not work as well for retailers.

Another key factor is profitability, or how much the company is making. Ideally, you’re looking for companies that are making more money than they need to spend on operating costs and maintaining their infrastructure. These profits, or earnings, are what the company uses to grow its business and pay out dividends to shareholders. Public companies are required to report their earnings each quarter, and good investors pay attention to these reports.

Choosing the best stocks to add to your portfolio can be a challenge. But you can start by making a plan, identifying your goals and the percentage of your portfolio you’re going to devote to each kind of investment. Then, you can find a broker who aligns with your needs, research the companies you’re considering and consider their historical returns. And remember, it’s impossible to know the perfect time to get into stocks — investing is meant to be a long-term activity, and you may have to rely on common sense as well as professional advice.