A stock is a financial security that represents an ownership interest – equity — in a publicly-traded company. When investors buy shares of a stock, they acquire a proportional claim on the company’s net assets and future earnings. Because of their historic track record of high returns, stocks are a core component of most investment portfolios. However, stocks also come with certain risks and should be viewed as long-term investments.

A company issues its stock through a process called an initial public offering, or IPO. Once a stock is on the market, it can be bought and sold among investors through an exchange like the New York Stock Exchange (NYSE) or Nasdaq. When an investor wants to buy a stock, they tell the exchange what price they are willing to pay for it (the asking price), and the exchange matches them with sellers. Investors can also trade their own stock through a broker or an online platform.

Shareholders of common stock have voting rights at shareholder meetings and a right to receive dividends when they are distributed. They also have a claim on the company’s assets and earnings, although this is often lower than that of preferred stockholders. Owners of preferred stock usually don’t have voting rights, but they may be entitled to receive dividends before common shareholders and a higher priority in the event that the company liquidates.

The prices of stocks are determined by supply and demand. When there are more prospective buyers than sellers, the stock’s price rises. This happens because prospective buyers want to buy the stock at the current price and believe it will have a higher value in the future. Eventually, more sellers attracted by the high asking price enter the market or buyers leave, and equilibrium is achieved.

As we mentioned above, the performance of a company’s stock will depend on a variety of factors, including its overall earnings potential. A company’s earnings can be affected by things like changes in the economy, competition and consumer spending habits. In addition, a company’s earnings can be impacted by special events, like natural disasters or product recalls.

Because of this, it is important to diversify your stock portfolio to reduce your risk and maximize your potential for return. You can do this by choosing companies that make products or provide services that people will continue to need and use in the long run, as well as limiting your exposure to companies with volatile histories or those that are heavily reliant on one product or customer base. Generally, it’s a good idea to diversify by industry sector as well, because different sectors tend to react to economic conditions in predictable ways. If you’re interested in learning more about investing, we suggest reading our guide to get started. It’s full of tips to help you determine your financial goals, risk tolerance and build a successful portfolio.