Stock is an ownership share in a company, and it gives you a claim to a company’s assets and earnings. Companies sell shares to investors so they can grow their businesses, hire more people and expand into new markets. Investors hope the value of those shares will go up, allowing them to sell them at a profit later on. Stock can also provide regular cash dividends, which can add to your investment returns. However, it’s important to remember that historical return figures are only part of the story.

A stock’s value can be determined by comparing it to an appropriate benchmark, like a market or sector index. But even then, there’s a lot of nuance that goes into making sense of a stock’s performance. For example, it may look great that a particular stock returned 20% this year, but did its performance compare to the average of the S&P 500? And how about adjusting for its size and risk level? These details matter because the performance of a single stock must be seen in context of the rest of your portfolio and of the overall market.

Understanding stocks involves evaluating a company’s business model, competitive advantage and management team. It also requires looking at a company’s current and past financial data and trends. You should also get to know how a stock is valued, which can include absolute valuation models such as discounted cash flow and dividend discount or relative models such as comparable company analysis. The latter approach allows you to compare the ratios of similar public companies to get a rough idea of the valuation of a given stock more quickly than the calculations required for an absolute model.

After valuing a stock, you can start to make predictions about its future price. This includes the stock’s expected one-year price target, which is an estimate of what many analysts think the stock will be worth in a year. Keep in mind, though, that forecasts are just that: estimates. They can be wrong, especially when they’re based on a single factor, like a company’s deteriorating business conditions.

You can buy and sell stocks through a brokerage account, where you tell the broker what you want to do (buy or sell) and how much you’re willing to spend. Then the broker will use its own software to execute your order and record the transaction for your account. The process can be done online or over the phone, and you can often choose from a variety of exchange-traded funds (ETFs) to streamline the process. However, you should always consider the potential fees and tax implications when choosing a trading or investing strategy.