Investing in stocks can provide the opportunity to earn higher returns compared to other investments such as bonds, real estate and cash. However, it’s important to develop a comprehensive financial plan before allocating your portfolio to stocks that reflects your investment horizon and the amount of risk you’re willing to take.

A stock represents a piece of ownership in a publicly traded company. When a company raises money to grow, it issues shares of stock to the public in order to do so. The value of the shares is determined by market forces such as supply and demand. In general, the more popular a stock is, the higher the price it will be.

In addition to market forces, the overall economic environment can also affect stock prices. For example, if investors believe that a company’s revenue or profit is going to decline, the stock may drop in response. Conversely, if investors receive positive news about a company, its stock price may rise.

Shares of stock are typically listed on a public exchange, such as the New York Stock Exchange (NYSE) or Nasdaq. They can be purchased through a broker, which acts as an intermediary between you and the companies you invest in. Most brokerages offer a number of ways to buy and sell stocks, including via phone or online. You can also purchase shares through a direct stock purchase plan, an employee stock option plan and more.

Once you own a share, you can either hold onto it for the long term and earn capital gains or sell them in order to get a quick return on your investment. A company’s profits are reported to shareholders in the form of dividend payments, which are usually distributed on a quarterly basis. Dividend payouts are based on the company’s earnings, which are calculated by subtracting out its operating expenses from its total revenue.

When you own a share of a stock, you have voting rights and can participate in decisions that impact the company’s direction. There are two main types of stocks: common and preferred. Each has its own unique set of benefits and risks.

When analyzing a particular stock, investors are typically looking for a number called a “price-to-earnings” ratio. This calculation is a gauge of how much a stock’s price is over or undervalued based on its current earnings and forecasted future ones. A good place to start your research is by examining a company’s filings with the Securities and Exchange Commission, which will usually include an array of financial ratios that are useful in evaluating a business’s performance.