A stock is a share of ownership in a company, and a key component of a diversified investment portfolio. Investing in stocks can be an effective way to grow wealth and outpace inflation over the long term, but it’s important to understand what you’re getting into before you start purchasing individual shares. A stock’s price will fluctuate, and it may also be affected by factors outside the company, such as the performance of the market or the economy.

Companies issue stock to raise money, and investors can buy and sell them on a public stock exchange. As a shareholder, you receive voting rights in the company and the right to dividends, or earnings distributed to shareholders.

Investing in stocks provides a way to own part of the world’s best businesses, and in aggregate they have historically generated solid returns over time. However, it’s important to remember that the stock market can be volatile, and even large companies can lose money during some periods. A good investor should develop a long-term strategy and avoid making decisions based on daily news cycles.

There are numerous metrics and ratios that can be used to evaluate a stock, but they should all be considered in the context of the overall business plan and management team’s vision for the future. Many successful investors have developed a keen ability to judge the intrinsic value of a stock, and it is one of the most important skills in investing.

In addition to the fundamentals, you should consider a stock’s price in relation to its peers. A stock’s price is determined by supply and demand, and it is often influenced by speculators who are trying to predict the direction of the market. The stock price can also be influenced by factors within the company, such as a faulty product or a bad business decision.

Another useful metric is the price-to-earnings ratio, which compares a stock’s price to its per-share earnings. This is a common tool in evaluating the relative value of stocks, and it is used by both investors and analysts. This metric can be a helpful tool for comparing similar companies, and it is important to keep in mind that the higher the P/E ratio, the more risky the stock is.

Lastly, it’s important to consider a stock’s tax status. While long-term investors can hold their stocks without paying capital gains taxes, short-term profits are generally taxable. If you’re planning to sell your stocks, it’s wise to consult with a tax professional to discuss your options.

Stocks can be grouped into categories based on their sector, and this can be helpful when analyzing the overall health of the market. For example, stocks in sectors like information technology, consumer discretionary, and telecommunication services can be sensitive to economic conditions. They may decline during a weak economy, while stocks in sectors like consumer staples, utilities, and healthcare are likely to be less volatile. In general, it’s important to diversify your stock portfolio across sectors and regions to reduce your exposure to risk.