Investing in stocks gives you partial ownership of a company. Stocks are shares in a public company, and they’re the units into which ownership of a company is divided. Typically, each share has a value that’s based on the company’s market capitalization. A stock’s price can also be influenced by its liquidity and competitive advantages.

While every type of investment comes with some risk, stocks have a proven track record of outperforming other types of investments over time. As a result, they are an important component of every portfolio. However, every investor has different goals and expectations for returns. For example, one investor might be happy with a 3% return over five years, while another might be disappointed with that performance.

The first step to evaluating a stock is understanding its fundamentals. A stock’s price is a function of its demand in the market, which is influenced by many factors, such as business forecasts and market conditions. Some of these factors can be directly attributed to the stock, while others are more macroeconomic in nature.

For instance, a stock’s price might increase due to a strong earnings report or news of a merger. In contrast, a stock’s price might decrease because of bad news, such as a lawsuit or a bankruptcy.

Stock prices are also influenced by how competitive the industry is. Companies with a monopoly or near-monopoly market segment enjoy higher profits than those in competitive industries, which can boost their share prices. A stock’s competitive advantage is often determined by the company’s intangible assets, such as intellectual property and brand recognition.

Other factors that can influence a stock’s price include its profitability and its dividend payments. Investors can use a variety of metrics to calculate the stock’s profitability, including the P/E ratio and the cash flow margin. In addition, investors can consider the company’s dividend payouts and how they might be affected by inflation rates.

In addition to these quantitative metrics, it’s essential for investors to take into account the qualitative strengths and weaknesses of each company. For example, a company with a defensible economic moat is more likely to succeed against new competitors, while a company with a large user base enjoys network effects. These qualities are difficult to quantify, but can help investors make better decisions when analyzing a stock’s potential for return on investment.