Stock is a share of ownership in a public company that gives the holder a claim on a company’s earnings and assets. It is one of the most fundamental tools in an investment portfolio and is a key part of diversified investing. Understanding how stocks work is a critical step in building a sound investing strategy.

When a company issues stock, it is inviting investors to buy shares that represent fractional ownership of the company. Each share entitles the owner to certain rights, including voting power and dividends (a portion of profits) if they are distributed. In addition, the owner can sell their shares at any time. Companies raise money by selling stock, which can be used to finance growth projects, pay debt or make acquisitions. Stock can be either common or preferred, and different types have differing privileges.

A stock’s price changes based on demand from new buyers and the supply of existing shares. These fluctuations are what give the market its volatility. Investors may decide to buy or sell based on company performance, economic conditions, or the perception that a particular stock is under or overvalued. These valuations aren’t always rational, as individuals often buy high out of greed and sell low out of fear. Professional investors and traders, on the other hand, have more time and resources to invest and are able to use sophisticated trading models and computer systems. The combination of these factors shapes the overall stock market and produces the prices we see on our financial news sites.

Stocks are considered long-term investments because of their historically higher rates of return compared to bonds. However, this isn’t a guarantee that your stock will grow or even make a profit. It’s not uncommon for a stock to go down in value over the short term, and many investors experience some serious losses before recouping their initial investment.

Despite the risk, stocks remain one of the most popular ways for people to build wealth. People save for retirement and other long-term goals by purchasing stocks in a wide variety of industries. This helps them mitigate the risk of a single industry struggling, or losing all its value, and provides them with an opportunity to earn a solid rate of return.

A major advantage of stocks is that they are liquid, meaning they can be sold quickly and easily. This makes them a good option for diversification, as they can change in value independently of other investments like real estate and bonds. Another benefit is that many companies pay dividends to their shareholders, which can be a great supplement to other income sources. Lastly, stocks can be traded on multiple exchanges around the world. The two largest are the New York Stock Exchange and Nasdaq. Other exchanges can be found in places like London and Tokyo. All exchanges have rules and regulations to ensure fair trade and investor confidence. They also publish real-time stock information for the benefit of the investor community.