A stock is an ownership share in a corporation or company. When a company goes public, its stocks are traded on exchanges like the New York Stock Exchange and Nasdaq, giving everyday investors the opportunity to buy into the company. Ownership of a stock also gives investors voting rights in shareholder meetings and the ability to sell their shares. For these reasons, many careful investors build diversified portfolios of stocks in order to gain from both dividend payments and price appreciation.

A company’s stock is priced based on the amount of demand for that stock in the marketplace, relative to the number of shares in circulation. This means that the more people want to buy a certain stock, the higher its price will rise as buyers compete with one another to outbid each other in the effort to find a seller. Conversely, if demand is lower than the amount of shares in circulation, the stock’s price will decline as investors are not willing to pay as much for it.

Stocks are not the only way to invest in a company, but it is the most common investment vehicle for individuals and institutions. There are other types of investments, such as bonds and savings accounts, that can be used to earn an income, but the risk-adjusted returns on stocks have historically been superior.

There are different ways to value a stock, and the best approach depends on the type of business. A bank’s stock may be valued by its assets, requiring a price-to-book ratio; retail companies, on the other hand, are not as asset intensive and instead focus on selling products for profit, meaning that they are more likely to be evaluated using a price-to-sales or price-to-earnings ratio.

Investors also look at the growth of a company’s earnings and revenue to determine its fair value. Those companies with consistent and strong earnings growth are often able to command a higher P/E ratio, and those that have a competitive advantage in the marketplace, such as a powerful brand name or unique technology, tend to be able to achieve higher fair values.

Another important factor in determining a stock’s fair value is its liquidity, or the ease with which it can be sold to other investors. A stock that is difficult to buy or sell can lead to higher transaction costs for the individual investors involved, which will eat into their return. A good rule of thumb for a stock is that it should be no more than twice its annual earnings per share, which allows investors to quickly and accurately evaluate a company’s potential profitability. Moreover, this calculation removes the need to evaluate the company’s assets and debts, as well as other factors that could impact its financial health.