A stock represents a share of ownership in a company and a claim on the business’s earnings and assets. When the value of a stock rises, investors make money and when it falls, they lose money. Shares are generally bought and sold electronically on a market, such as the New York Stock Exchange or National Association of Securities Dealers (NASDAQ). Stocks are an important part of a diversified investment portfolio because they offer more potential for growth (capital appreciation) than other investments like bonds.

A key factor in determining whether stocks should be a part of your portfolio is how much risk you’re willing to take and your overall financial plan, including your investment horizon. Historically, stocks have provided the highest rates of return, but they also tend to experience more volatility than other investments.

Stocks are risky because the price of a share can go up or down, depending on demand and other market factors. The best way to manage stock volatility is through diversification, by incorporating stocks into a broader investment portfolio.

The price of a stock is determined by how much people are willing to pay for it, and the demand often reflects the prospects for a company’s future performance. However, the true value of a share is its intrinsic value, which is based on a company’s fundamentals. A valuation method called discounted cash flow (DCF) helps determine the intrinsic value of a company and is used by value investors.

Another way to classify shares is by their size, as indicated by their market capitalization. There are large-cap stocks, mid-cap stocks, and small-cap stocks. Very small-cap stocks are sometimes referred to as “penny stocks,” and they may have little or no earnings.

Companies can also classify their stocks according to whether they pay dividends. A company might choose to reinvest its profits into the business instead of paying out the earnings as a dividend to shareholders. Companies that do pay dividends usually have a consistent record of profitability and growth.

Investors can also divide stocks into different groups by the way they behave and perform. There are growth, value, and momentum stocks. Growth stocks are those that have a high growth rate and potentially offer the greatest potential for capital appreciation. Value stocks are those that have a steady record of profitability and growth and are undervalued by the market.

Some companies issue different classes of stock, granting each class unique voting rights. For example, Alphabet (the parent company of Google) has three classes of stock—Class A gets one vote per share, Class B shares are not publicly traded and exist to help the founders retain control of the business, and Class C shares don’t have any voting rights. These types of distinctions are usually noted on a stock’s ticker.