What is a stock?

A stock — a share — is a unit of ownership in a company. If a company has issued one billion shares and you own one hundred of them, you own one ten-millionth of that business.

That is not a metaphor. It is the legal position. You own a fraction of everything the company owns and a fraction of everything it earns, along with a vote on certain decisions.

What ownership actually gets you

• A claim on future profits. Delivered either as dividends paid to you in cash, or as profits retained and reinvested in the business — which, if reinvested well, makes each share worth more.
• A vote. Usually one per share, on matters like electing directors. In practice this matters far more for large holders than small ones.
• A claim on assets, last in line. If the company is wound up, shareholders are paid after employees, suppliers, tax authorities and lenders. This is why shares are riskier than bonds issued by the same company.

Where the price comes from

A share price is not set by the company. It is set continuously by buyers and sellers agreeing on a price — the same mechanism that sets the price of anything traded.

What buyers and sellers are trying to estimate is the value today of all the cash the business will generate in the future. Because nobody knows that number, the price moves as opinions about it change.

Where returns come from

Only three sources, and it is worth being able to name them:

1. Earnings growth. The business makes more money than it used to.
2. Dividends. Cash paid directly to shareholders.
3. Multiple expansion. Other investors decide to pay a higher price for the same earnings.

The first two come from the business. The third comes from sentiment, and it can reverse. Over a year, the third often dominates. Over a decade, the first two usually do.

The common misunderstanding

Buying a share on the open market does not send money to the company. You are buying from another investor. The company received money only when the shares were originally issued.

This matters because it clarifies what you are doing: not funding a business, but purchasing a claim on its future earnings from someone who currently holds that claim and values it differently than you do.