When you buy shares in a company, you become part owner and make money if the business succeeds. But there are many factors that affect a stock’s price, including potential good news or bad news and the overall economic conditions. Those factors can cause shares to rise and fall on a market, or exchange, where individuals and institutions buy and sell them.

A stock represents ownership equity in a firm and gives shareholders voting rights and a residual claim on the company’s earnings in the form of capital gains and dividends. The company determines the number of shares to issue, and if it is publicly traded, those shares are listed on a stock exchange where individual and institutional investors can buy or sell them. Stock exchanges set share prices based on supply and demand, with the overall effect of the market in which they operate.

The value of a share is determined by the fair value of the stock, which takes into account the company’s fundamentals, and the market value, which is influenced by demand and investor sentiment. The fair value is a better reflection of the intrinsic worth of a share than the market, which may be misleading as individual demand can change quickly due to new information or changes in investor perception. If the demand for a stock outweighs the supply, then its price will rise, and vice versa.

As a whole, the stock market serves as an important indicator of overall economic health and sentiment, with rising stocks typically seen as evidence of confidence, while falling stocks suggest concerns. Many companies, however, have no direct relationship with the overall market and can experience a decline in their share price even if there is no significant change in the business or economy.

There are many ways to invest in stock, including through employer-sponsored retirement plans that allow you to choose mutual funds or exchange-traded funds that hold a large number of company stocks pooled together. You can also purchase individual stocks, but that’s generally a riskier approach and requires a higher level of understanding of the underlying businesses. You’ll want to be able to analyze the financial ratios used to judge a business’s profitability and future prospects, and you’ll need to take into account qualitative measures like network effects and defensible economic moats.

You can also diversify your portfolio by investing in different sectors, such as energy, technology and health care. Each sector tends to react differently to economic conditions, and you can further diversify by investing in different industries and companies within those sectors. Many financial professionals recommend focusing on companies with strong balance sheets and sustainable margins, as well as a clear competitive advantage in their industry. A strong competitive advantage may come from a monopoly position, a large customer base, a technological edge or a unique intangible asset. Depending on the tax laws in your country, profit from investments in stocks can be subject to double taxation—once by the corporation, and then again by you as an individual shareholder.