Stocks, particularly publicly-traded common stocks, are a staple in nearly every investment portfolio. They have a history of high returns, but they also expose investors to significant near-term risk and can dramatically decline in value. For these reasons, prudent investors should always seek to diversify their stock holdings to reduce their exposure to price fluctuations and volatility.

A stock represents a fractional ownership stake in a company. A single share of a public company is worth a proportionate claim on the company’s net assets and future earnings. Public companies issue shares to the public to raise capital for expansion and growth. Investors buy and sell these shares on a public exchange, like the New York Stock Exchange or Nasdaq, with each share having a purchase or bid price, and a selling or offer price. Purchasing or selling stocks is usually accomplished through a brokerage account, which is a brokerage firm that acts as the intermediary between buyers and sellers.

Ownership in a company gives you the right to vote at shareholder meetings, receive dividends (payments of a portion of a company’s earnings), and see its shares appreciate in value over time. In some cases, owning a large enough percentage of a company can even give you ownership in the whole company, which gives you more voting power and control over how a company is run.

The fundamental reason for investing in a company is to generate long-term income on your investments, which can outpace inflation and allow you to improve your personal financial situation. The primary source of this return comes from dividends and price appreciation.

Earnings and stock valuation

A successful company will grow its stock prices by generating more earnings per share. This is logical, since one dollar of earnings can either be used to pay shareholders in the form of dividends, or invested in the company’s growth to increase future earnings.

The valuation of a stock is the market’s appraisal of how much the company is worth at any given time. This appraisal is based on a number of factors, including business conditions and the economy. It also takes into account the likelihood of the company going private or being acquired by another company, which can significantly change the stock’s price.

In addition, the market prices of stocks are affected by the overall economic environment, as well as specific news events such as natural disasters and communications crises. For these reasons, it’s important to keep up with general market trends and read the business sections of newspapers to understand why prices are up or down in particular sectors or individual stocks.

The more demand for a stock, the higher its price. This is because a company with a large market share has more potential customers and has the ability to set the pricing for its products. This is why some companies with monopolies or strong market positions have stock prices that are substantially higher than those of competitors in less consolidated industries.