Stock is one of the most common types of investments available to individual investors. It is also one of the riskiest investments. While you can make money on stocks if the company goes up in value or pays out dividends, there is always the possibility that the company could go bankrupt and leave you with nothing. The best way to minimize that risk is by investing in good companies and staying invested over the long run.

A share of stock, also known as equity, represents a fractional ownership in a corporation. It operates differently than a bond, which acts like a loan from creditors to the company in return for periodic payments. A corporation issues shares to raise capital, or money, for business projects and expansion. Investors can then buy and sell these shares in a public marketplace, called a stock market. A company can have either common or preferred shares, which determine the rights and benefits of ownership.

When a company decides to offer its shares to the public for the first time, it is said to be going public. It then places its stock on a market, typically a public exchange like the Nasdaq or New York Stock Exchange. Individuals and institutional investors can then purchase the company’s shares.

Whether the company goes up or down in value, stockholders will receive dividends, or distributions, if it has earnings left over from its business activities. This can be a good source of income, although some companies choose to reinvest earnings into their businesses instead of paying out dividends. Stockholders can also make money by selling their shares in the open market for more than they paid, a process known as making a profit or capital gains.

Some investors prefer to invest in companies that have low market values relative to their book value, which is a conservative measure of a company’s worth. This is known as value investing. The value of a stock can also be determined using several methods, such as price-to-earnings ratios or price-to-book ratios.

Investing in stocks has been shown to provide strong returns over the long term, but it’s important for individuals to weigh the risks and rewards carefully before investing. They should also determine their risk tolerance and financial goals before deciding to invest in stocks. To reduce their overall investment risk, many people diversify their portfolios with other types of investments, such as bonds and real estate.