Many people invest in stocks for the hope that they’ll help them achieve their financial goals. While some people make money from the long-term growth of a stock, others experience losses as the price of individual shares go up and down. Understanding how a stock works can help investors avoid making mistakes that might cost them money.

A stock is an ownership share of a publicly traded company. A company issues stock to raise funds that it uses for operations and projects. Unlike a bond, which operates like a loan from creditors to a company, a share of stock represents fractional ownership of equity in an organization. The type of stock (common or preferred) held determines a shareholder’s rights and benefits.

Investors buy and sell stocks through a broker who maintains a trading account on their behalf. When an investor types a stock ticker symbol into the broker’s website or app, the broker (or a computer it owns) buys the stock and records the transaction for the investor’s account. Traders also trade stocks by phone, and large blocks of stock may be exchanged in what’s known as the “trading pit.”

When companies first go public, they usually have a limited number of shares that they can offer to investors. This is called an initial public offering, or IPO. Once a company is listed on a stock market, it can issue additional shares or let existing shareholders sell their shares. Investors can also purchase shares through secondary markets.

In general, a stock’s price goes up if traders think the company’s earnings will rise, or its assets are worth more than the debt it owes. The opposite is true if traders expect the company’s earnings to decline, or the assets will be worth less than the debt.

Some businesses pay dividends to shareholders, which can be a source of income. If a company does not pay dividends, its owners can make money by selling shares in the open market.

Stocks have been traded since time immemorial. Early examples include property, livestock and precious metals. There are records of debt and futures being traded as early as 1602. In the modern era, the stock market was born when the Dutch East India Company started issuing shares in 1602, and it paved the way for today’s global economy.

Most companies have two kinds of stock: common and preferred. Common stock is what most people buy and hold, but there are also other varieties of stock. These types of stocks come with different rights and benefits, such as the right to vote on decisions that affect a company.

Some investors seek higher returns on their investments by buying stocks in many different companies, or building a diversified portfolio. However, it is important to remember that large companies, as a group, lose money about one out of three years, and it is possible to lose all your invested capital. Moreover, a single company’s stock can be affected by factors that are out of the control of the issuing company, such as political or market events.