When you buy a share of stock, you own a piece of a publicly traded company. This gives you special privileges, depending on the class of stock. For example, you may have voting rights or a right to share in the company’s profits, known as dividends. You may also have the right to receive a portion of a company’s assets upon liquidation. Stock prices can rise or fall in response to events, economic conditions and market sentiment.

How to Determine Stock’s Value

Investors try to identify stocks that are undervalued and buy them at low prices, hoping to eventually make a profit when they sell. Valuing a stock involves comparing it to similar companies in the market and looking for signs of over or undervaluation. You might use the price to earnings ratio, which combines the market price per share with the company’s earnings per share, or you could use another method of evaluation, such as the Benjamin Graham formula for buying undervalued stocks, which calculates intrinsic value based on a number of factors.

Other important considerations include stock seasonality and the risk of a financial crisis or recession, which can cause large drops in share prices. The summer months are historically tough for the markets, while September and October can be difficult, too. Year-end tax-loss selling can depress shares, as well. In addition, certain companies may see their shares lose value due to industry or company specific news.

Stocks are an important part of any portfolio, but before you invest, you should have a comprehensive financial plan that reflects your investment horizon and the level of risk you’re willing to take. Your plan should include the amount of money you want to invest and how long you’re willing to wait to achieve your investing goals.

The purpose of stock markets is to raise capital by allowing investors to share in the profits of companies that grow their business and generate income. This process is facilitated by the price discovery mechanism, which determines the price of a stock in real time based on the collective actions of buyers and sellers. This dynamic system promotes efficient allocation of resources and helps to ensure that capital is directed toward the best opportunities.

Stocks are a key component of any well-diversified portfolio because they offer the potential for higher returns than most other investment products. However, stocks can be volatile, and they’re not a good fit for every investor’s risk tolerance. Learn more about how to incorporate stocks into your portfolio.