Stocks are part of the financial world’s toolkit, helping people grow their savings and save for long-term goals like retirement or education. But they aren’t without risk; stocks can lose value and sometimes even become worthless. That’s why many investors diversify their portfolios by buying stocks in a variety of companies large and small across multiple industries to help mitigate risks and achieve higher long-term returns.

A stock, also known as equities, is a security that represents a fraction of ownership in a publicly traded company. When you buy a stock, you become a shareholder, and as a shareholder you have the right to receive dividends when the company distributes them and can vote at shareholders meetings. You also have the potential to make money when the company’s stock price rises.

Investors typically use stocks to generate long-term returns that outpace inflation and other asset classes, such as bonds or real estate. But that’s not the only reason to invest in stocks: many people hold them as part of a well-diversified portfolio because they can provide some of the best protection against the impact of rising inflation.

Most publicly traded stocks are common stock, which offers voting rights and the possibility of profit and price appreciation. But some companies may issue other types of shares that offer different voting rights or other privileges, such as preferred stock. The difference in privileges between the different classes is what drives differences in share prices.

The underlying reason that stock prices change is the same as for any other type of investment: supply and demand. When more people want to buy a stock than are selling it, the price will rise. The opposite is true when there are more shares available than demand, and the share price will fall.

A stock’s price is based on both the current performance of the stock and the expectations of the market, which in turn are determined by the overall economy, government policies, industry performance and more. During times when the economy is strong, the markets tend to be more optimistic, and so do the stock prices.

During times when the economy is weak, the markets are more pessimistic and so are the stock prices. The stocks of businesses that have the greatest growth potential are expected to perform better, and their share prices are more likely to rise.

When comparing stock returns, it’s important to look at the total return of the stock over a period, including any income from dividend or interest payments in addition to the price return. That will give you a more complete picture of the actual investment performance than just viewing the starting and ending stock prices for each period. You can find this information on sites such as MarketBeat or through data feeds from brokerages. Using the average annual return metric, or CAGR, is another way to track a stock’s performance over time.