A stock represents a fractional ownership stake in a corporation. It is distinguished from other forms of financial assets, such as bonds and cash, which are used to finance business operations. A stock’s value rises or falls based on a number of factors, including market conditions and corporate decisions, such as whether to expand into new areas of business. Ownership of a share of stock also entitles the shareholder to a portion of the corporation’s profits.

Companies issue stocks to raise capital from investors. In order to purchase shares, an investor must open a brokerage account and tell the broker what ticker symbol to enter when placing orders. The broker then uses the information to buy shares for the investor’s account. A stock may be common or preferred, with the differences largely based on how shareholders can vote at shareholder meetings and receive dividends.

In evaluating the value of a stock, many investors consider its price-to-book and price-to-sales ratios, as well as other valuation measures. However, the valuation process is not purely analytical: It can be influenced by things like the strength of competition, management changes, macroeconomic trends, advances in technology and changes in consumer preferences.

Another tool that helps in valuing a stock is its historical returns. Returns can be calculated by looking at how much a stock has returned for a given period, or for a longer time frame, as well as considering the impact of dividend and interest payments. Investors often take into account the impact of inflation when calculating historical returns as well.

A stock’s returns can also be compared to other companies by viewing how it performs within its industry or market sector. This can help determine if a company is trading below or above its historical averages. However, the results must be put into context, because different industries and markets react to economic conditions in varying ways.

For example, if the economy is weak, sectors such as information technology and consumer discretionary can suffer, while those that are essential to people’s day-to-day lives (like utilities and health care) tend to be more stable. As a result, it’s important for investors to diversify their portfolios by investing in multiple sectors and countries. They should also diversify by investment style and risk level to maximize their chances of success in the long run. For some, this means choosing low-risk investments that will provide stable income, while others seek high-growth opportunities. Regardless of the strategy, it is important to plan ahead and be patient. The long-term rewards from a sound stock investment can be considerable.