Stock is an ownership share in a company that chooses to make its shares publicly available for investors to buy and sell. The term stock is also used to refer to the market where these stocks are traded, which is called the stock exchange. Stocks are a common way for companies to raise money, and they can be a great investment over the long run when they rise in value, outpacing inflation and delivering dividends along the way. Stocks can also be a great way to diversify your portfolio by owning a small stake in many different companies and industries, reducing the risk that any one company you invest in fails completely.

When a company issues its first batch of stock, it will work with investment bankers to set a price for the initial public offering (IPO). This will be based on valuation and demand from institutions. Once a company is listed on the public markets, however, the price of its shares can be affected by supply and demand on a second-by-second basis. The more buyers are interested in a stock, the higher the price that will be paid for it. Conversely, when there are more sellers than buyers, the price of a stock will decline. This is why Benjamin Graham, Warren Buffett’s mentor and renowned investor, called the stock market “a voting machine.”

Regardless of their size, all publicly traded stocks are considered securities, meaning they can be bought and sold through regulated exchanges like the New York Stock Exchange or Nasdaq. Each share represents a fraction of ownership in the company, and the type of stock determines if you can vote at shareholder meetings or receive dividend payments, as well as whether or not your shares are protected from bankruptcy.

In the short term, a stock’s price can be driven by news about the company or the overall market, and the market can get excited or worried about a particular business or sector. But on a long-term basis, a stock’s price is determined by the earnings power of the business itself. This is why it’s important to be able to value businesses accurately. This is accomplished by comparing their earnings with the earnings of their peers. There are a variety of valuation ratios that can help you assess this, including the price-to-book ratio, price-to-earnings ratio, and price-to-sales ratio.

It is important to note that while stocks have a historical return of around 10% per year, it’s not guaranteed that any specific stock will rise in value. In fact, it’s entirely possible that a stock will lose its value, or even go out of business. That’s why it’s always smart to spread your investments across a wide range of stocks, and diversify your portfolio. It is also essential to understand that over the long run, the return on a stock’s investment will be greater when it is in an expanding industry with high switching costs. This makes it easier to attract and retain customers, which will lead to higher profits over time.