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How the Stock Market Works: Owning a Slice of a Business
💡 A stock is a fractional ownership stake in a business, and its price reflects the market's collective expectation of the company's future profits — not its past results.
When you buy a share of stock, you're not buying a lottery ticket — you're buying a tiny piece of ownership in a real company. If a business divides itself into 1 million shares and you own 1,000 of them, you own 0.1% of that company: its factories, its brand, and its future profits. This is what "stock" means — fractional ownership (also called equity) of a business.
So why do prices bounce around every day? Because a share's value depends on the company's future profits, and nobody knows those for certain. A stock price is really the market's best guess about how much cash the business will generate over the years ahead. Recall the idea of present value from earlier: today's price reflects future earnings, discounted back to now.
This is why prices move on expectations, not just current results. Imagine a company earns $10 million this year, and its stock sits at $50. If it announces a new product that investors believe will double future profits, buyers rush in and the price might jump to $80 — even though nothing has actually been earned yet. Likewise, a company can report record profits and still see its stock fall, if investors expected even more. The market prices the future, not the past.
Prices are set by supply and demand among millions of buyers and sellers. Each trade nudges the price: more eager buyers than sellers pushes it up; the reverse pushes it down. No single authority "sets" the price — it's the constantly updated consensus of everyone's expectations.