Investing in stock offers the opportunity to partake in the growth of an actual company and its success over time. As with any other investment vehicle, stocks can be volatile and investors should consider their risk tolerance and financial goals before committing to the long-term. However, if managed properly, stock can offer more return potential than other forms of investing and can be an important part of any balanced portfolio.

When companies go public, they usually sell shares to raise funds and grow their business. Stock represents an ownership stake in the company and entitles shareholders to a share of the company’s assets and earnings. Companies use the money raised by selling shares to grow their businesses and create jobs. Investors buy stocks in the hopes that the company will increase its revenues, earnings and value over time.

To help determine whether a stock is worth buying, many investors use fundamental analysis to evaluate individual companies and the overall market. This can include financial ratios and looking at a company’s past performance. One of the most common ratios is earnings per share, or EPS, which shows how much a company is earning for each outstanding share. The price-to-earnings ratio is another popular metric for evaluating stock prices.

A stock’s price fluctuates based on supply and demand. When a stock hits a ceiling of resistance in the market, it typically causes a shakeout in the shareholder base. This typically involves investors who bought late in the uptrend, or right at the end of it, and suffered a loss. They are looking to break even or even just recoup some of their losses by selling. This can lead to a drop in the stock’s price as it leaves the strong holders behind.

Investing in a stock is not a short-term endeavor, and it takes time to thoroughly research the company. A good place to start is with the company’s filings with the Securities and Exchange Commission, which can provide a wealth of information, including financial statements. A stock’s valuation may also be influenced by other factors, such as macroeconomic trends and the popularity of the company in the media.

Stocks are an important tool to diversify a portfolio and gain exposure to different industries and countries. Many large foreign companies list on the U.S. markets as well as their home country to expand their investor base. To facilitate trading, these foreign companies maintain a block of shares at a holding bank in the U.S, and the bank establishes American depositary receipts (ADR) for each share it possesses in the United States.

Some investors specialize in a particular sector of the market, such as technology or healthcare. These investors often seek out stocks with a strong track record of growth, or stocks that are expected to increase at a higher rate than the overall market. Others may look at a stock’s qualitative strengths and weaknesses, such as a defensible economic moat or network effects.