How to Evaluate a Stock

Stocks — also known as company shares or equities — are one of the most popular investment vehicles for accumulating wealth. They represent partial ownership of a business, giving investors the opportunity to participate in a business’s successes or failures over time, depending on their performance. As such, stocks are an important part of any diversified portfolio.

Stock is the portion of a company that is publicly available for sale. Typically, companies issue stocks to raise capital and grow their businesses. In general, the value of a stock rises or falls with the company’s earnings and assets. It differs from a bond, which operates like a loan made by creditors to a company in exchange for periodic payments.

A stock may also refer to the last trade price on a trading platform. It includes the bid and ask prices, which are the highest and lowest prices that people are willing to pay or sell for a share of a stock, respectively.

The stock market is a network of buyers and sellers, and it’s not always easy to predict the direction of individual stocks. However, those who stick with stocks over long periods of time, such as 15 years or more, have historically been rewarded for their commitment with strong, positive returns.

There are many ways to evaluate a stock, from quantitative metrics such as price-to-earnings ratios to more qualitative factors such as management strength and industry competitiveness. Companies with a defensible economic moat — a competitive advantage created by patents, regulations, brand recognition or other intangible assets — tend to be more profitable than those without such advantages, as they are better able to retain customers and limit the effects of competition.

Another important consideration when evaluating a stock is dividends. Dividends are a way for companies to share their profits with shareholders, and they can be an excellent source of income over the long term. When considering a potential stock, it’s worth understanding how much the company pays in dividends and how they compare to their total annual return.

A stock’s valuation can be determined by a variety of metrics, including price-to-earnings ratios and discounted cash flow analysis. In addition, a company’s financial history and growth prospects are important factors to consider, as are the quality of its managers and the company’s business model. Temporary setbacks or pessimism about a company’s future could create undervalued opportunities, particularly if these events cause the stock to underperform its peers.