Stocks, company shares or equities, are a fundamental part of many investors’ plans to build wealth. But they aren’t necessarily easy to understand, even for seasoned investors.

In simple terms, a stock represents an ownership interest in a publicly-traded company. When you buy a share of stock, you are purchasing a proportional claim on the company’s net assets and future earnings. The type of stock, common or preferred, that you hold determines your rights and privileges.

Companies can use stock to raise capital by selling shares on the open market. The value of a company’s stock is determined by the supply and demand for its shares, which are driven in turn by investor expectations for future performance. Strong investor demand, for example, may lead to a higher price, while weak demand may result in a lower share price.

When a company issues its shares to the public, it is known as an initial public offering (IPO). In general, a company raises money by selling stock in order to finance business growth. It can also use a portion of the proceeds to pay off existing debt or to repurchase its own shares.

There are two primary ways to make money from stocks: through a rise in their share price and through dividend payments. The latter are payments made by a company to its shareholders, which are generally a percentage of the company’s net earnings. Companies may also choose to reinvest profits rather than pay them out as dividends.

While there are several different stock valuation methodologies, most of them focus on predictions about a company’s future cash flows and profitability. The goal is to find the intrinsic value of a company, which can then be compared to what the market is willing to pay for its shares.

Traders buy or sell stocks based on their expectations about a company’s future earnings and profits. If traders believe that a company’s earnings will increase, they will bid up the price of its stock shares on the open market. Likewise, if traders expect that a company’s earnings will decline, they will sell their stock shares to avoid losing money.

There are many metrics that can be used to assess a stock’s valuation, but there are five essential stock ratios that all investors should know about. These ratios are useful for comparing the relative value of competing stocks, as well as for evaluating individual company’s strengths and weaknesses. In addition to quantitative measures, investors should also consider qualitative factors like a company’s defensible economic moat and customer switching costs.