If you want to participate in the success of companies that make products and services we use every day, stock (shares of a company) is a common investment vehicle. Stock can offer investors the opportunity to make money from both increases in share price and dividend payments. However, stocks can be volatile, meaning they can lose value as well as gain it. Investors should develop a comprehensive financial plan and understand the risks associated with owning stocks before investing.

A stock is a piece of ownership in a company that has been issued to the public. A company issues shares through a process called an initial public offering, or IPO. Once on the market, a stock can be bought and sold by other investors. Companies raise capital by selling their shares, and the proceeds can be used for a variety of business purposes.

The price of a stock fluctuates as buyers and sellers trade them. This is why many investors prefer to buy and sell through brokerage firms that can match supply with demand, which reduces their trading costs. A broker can also help investors choose appropriate investments by using a model to determine the intrinsic value of a stock, and help find stocks that are undervalued or overvalued.

Stocks can be classified into groups based on the type of industry they are in, or the geographic area in which they operate. This helps investors focus on a specific sector and avoid companies that are too expensive or risky. However, because the performance of a stock can depend on a number of factors outside the control of the company, it is wise to diversify the stocks in your portfolio by buying shares in a wide range of companies.

A stock’s performance over a certain period can be evaluated by looking at the historical return of that company, as well as comparing it to a benchmark such as the S&P 500, which includes around 500 of the largest companies in the U.S. The benchmark provides a comparison of how a company has performed relative to the market.

As a shareholder in a company, you don’t own a parking spot at the company lot or get to rub shoulders with the bigwigs. What you do own is a percentage of the company’s total value, represented by its outstanding shares. A stock is like a slice of ownership in a cupcake business: If the company makes more cupcakes than expected, you’ll be richer, and vice versa.

Generally, the value of a stock is determined by its earnings power. You can evaluate a company’s earnings power by looking at metrics such as its price-to-earnings ratio, or by valuing the company’s qualitative strengths and weaknesses. For example, a company with a defensible economic moat is better able to protect its profits, and companies with large user bases can benefit from network effects. In the end, it’s all about making sure that a company is worth more than what it costs to run it.