Stocks, also known as equities, represent partial ownership in a public company. As companies grow and become more profitable, their share price rises. This gives shareholders the opportunity to make money by selling their shares at a higher price than what they paid for them, or by earning dividends that are distributed quarterly. Stocks can be a cornerstone of an investment portfolio because they have historically produced higher returns than cash alternatives such as bonds or commodities.

Investors often buy stocks to participate in the growth of a company, or because they are a way to diversify an overall portfolio and achieve asset allocation or diversification goals. Stocks can be broken down into sectors and industries to help traders understand what they’re investing in, such as the technology sector or the computer hardware industry. Investors can also look at the price-to-earnings (P/E) ratio of individual companies to determine whether they may be undervalued or overvalued, depending on how enthusiastic investors are about a company’s future prospects and how much the market values a company’s earnings.

In addition, stocks offer a chance to invest in businesses that align with your personal or professional values. Some stocks support sustainability, social justice or diversity initiatives. It’s important to remember that there’s no guarantee you’ll earn a return on your investments in the stock market, and it’s not uncommon for investors to experience losses during certain periods of market volatility.

The primary advantage of owning stocks is the potential for high returns on your investment, which can help you grow your wealth and outpace inflation over time. In addition to generating a return on your initial investment, you’ll be able to earn income from dividends that are distributed periodically by the company, and some companies even provide a profit-sharing program where they distribute profits to shareholders in the form of additional shares.

Another key benefit of owning stocks is that they can have a strong correlation with the economy, which means that when the economy thrives, so too will your investments. While that’s not a guarantee, it is an indication of the potential for growth in your portfolio when you hold stocks.

A common concern that people have when considering investing in stocks is the fear of losing their money. However, stocks are relatively liquid, meaning that you can sell them quickly and easily through a broker or financial planner. This liquidity is important if you ever need to access your funds or rebalance your portfolio. In addition, you can reduce the risk of loss by comparing your returns to benchmarks, such as market or sector indices, and focusing on companies that have historically outperformed their benchmarks. This strategy is known as value averaging, and it’s an effective way to build a solid investment portfolio over the long term.