Stocks — also known as shares or equities — are an important part of many investors’ plans to build wealth. They offer the potential for growth that’s not always possible with other types of investments, but they can come with risk, too. Stocks can be confusing, but there are a few key points that all investors should know.

When you buy a share of stock, you become part owner of the company that issues them. Typically, you’ll make money if the company performs well, as this will result in an increase in the share price. You can also make money through dividends, which are payments made to shareholders on a regular basis from the company’s earnings. However, dividends may not always be paid, and the share price could decline over time.

Most stocks are publicly traded, meaning you can buy or sell them through an exchange like the New York Stock Exchange or Nasdaq. Each stock has a “bid” and an “ask,” which are the highest and lowest prices that people are willing to pay for the stock, respectively. The difference between these amounts is called the spread. For a trade to take place, a buyer must agree to pay the bid price and the seller must be willing to accept the ask price.

Companies that issue shares of stock usually do so to raise funds to grow their business. They often start by selling their shares to individual investors through an initial public offering (IPO), which is a process that gives those investors ownership of the company and allows it to access capital markets.

In addition to evaluating a stock’s performance, investors should consider the company’s size and industry. Larger companies tend to be more stable, but they also have less room for growth than smaller firms. In some cases, a company may choose to split its shares in order to make them more affordable. This doesn’t change the market capitalization, or total value of its shares, but it does increase the number of shares available on the market.

Another way to evaluate a stock is to compare it to similar companies within the same industry. However, it’s important to remember that just because two companies are in the same industry doesn’t mean they’re comparable. Using this metric to make decisions can be misleading, especially when you’re dealing with very different industries or companies that are just starting out.

Investors can also assess a stock by looking at its one-year price target, which is an estimate of what the share will be worth in a year’s time. This figure is calculated by analysts, who are typically trying to predict the future. But, as anyone who has ever listened to the weather report knows, predictions can be wrong. In general, careful investors avoid establishing highly concentrated positions in just a few stocks. Instead, they build diversified portfolios that include stocks from many industries and geographic regions. This helps them to diversify their risks and reach their investment goals more effectively.