A stock is a financial security representing fractional ownership — or equity — in a publicly traded company. Investors who buy shares earn a proportionate claim on a company’s net assets and future earnings, according to the Securities and Exchange Commission (SEC).

Companies issue stocks to raise capital from investors and expand their businesses. A company can also use its stock to pay dividends to shareholders.

Investing in stocks can be an effective way to grow your wealth and beat inflation over time, but it can expose you to near-term risks. For this reason, it’s important to understand the ins and outs of the market before investing.

The price of a stock can fluctuate due to factors such as economic news, company-specific news, and investor sentiment. A stock’s performance over the long term, however, is mainly determined by how well a business is operating. A business that is growing its sales and profits will likely see its stock rise, while a declining business will likely see its stock fall.

In addition to looking at a company’s profit growth and profit margin, investors should look at how other analysts view its potential. For example, Schwab’s Research page includes a “Peers & Ratio Comparison” section that compares a given company to a few industry peers. This allows you to see how a stock is being valued by other investors and helps you to spot possible danger signs.

When evaluating a stock, it’s important to consider how it fits into your overall portfolio strategy. Some investors use a model known as the

“efficient frontier,” which analyzes an individual’s investment goals, risk tolerance, and time horizon to determine the optimal mix of stocks, bonds, cash, and other assets.

In general, it’s generally considered a good idea to diversify your investments by investing in a broad range of stocks. This approach can help you reduce your exposure to any single market event and increase your chances of achieving your long-term investment goals.

Unlike bonds, which act more like loans from creditors to a company in return for regular payments, stocks offer a monetary payout when their prices appreciate over time. This upside is one of the primary reasons that many investors choose to include stocks in their portfolios.

However, remember that stocks are volatile and can decline quickly if a company’s results disappoint or there is widespread concern about the economy or specific markets. To protect your portfolio, it’s important to invest with a long-term perspective and divorce yourself from the daily news cycle.