A stock is a share of ownership in a company, and each share represents fractional ownership of the company. People invest in stocks because they hope the company will grow in value, which can lead to increased profit when the shares are sold. A stock may also pay dividends, which are a return on the company’s profits that investors receive. Stock prices fluctuate throughout the day, but over the long term, many stocks have historically outperformed other asset classes like bonds and real estate.

Evaluating a stock requires more than just looking at its price performance over time. You need to consider factors like dividend or interest payments, as well as inflation. You should also look at the stock’s performance relative to other stocks in its industry. This helps you determine whether the company’s stock is being priced fairly, or if it is undervalued or overvalued.

There are a few different ways to measure stock value, but the most popular is the price-to-earnings (P/E) ratio. This is a measurement of the market price per share divided by the company’s earnings per share. Other common measures include price-to-book and price-to-sales ratios. These ratios are useful because they give you a sense of a company’s value based on its assets or profitability. However, the valuation methods used by different companies and industries differ. For example, a bank’s value is determined by the number of its assets and how well those assets are growing. A retailer, on the other hand, is valued by how many items it sells and its ability to turn that inventory into a profit. As a result, retailers tend to have higher sales-to-book and price-to-sales-to-earnings ratios than banks.

Another important factor to consider is the company’s qualitative strengths and weaknesses. For example, a company with a defensible economic moat can hold its own against competitors that enter the market, while companies with large user bases benefit from network effects and have an easier time retaining customers. Moreover, high-quality businesses often have intangible assets that have significant value, such as patents and brand recognition.

You should also understand how the economy affects stock performance. Sectors like information technology and consumer discretionary companies are more likely to suffer when the economy is weak, while utilities, healthcare and consumer staples can weather economic downturns better. As a result, it’s important to diversify your portfolio to minimize the impact of changing economic conditions.

When evaluating a stock’s performance, it’s important to compare it to the performance of other stocks in its industry and in the broader market. It’s also important to consider how a stock has performed year to date (YTD) and over the past 52 weeks. Finally, it’s a good idea to look at the average annual returns over the past five and 10 years, as these can provide context for predicting future performance.