What is a Stock? Introduction to Capital Markets

When you buy a share of stock, you are not lending a company money and expecting it back. You are buying a slice of ownership — a proportional claim on everything the company will ever earn, forever. That distinction sounds minor but it changes everything about how you should think about valuing a stock.

A bond pays you fixed interest and returns your principal. A stock pays you nothing guaranteed. What you get instead is a fraction of all future profits, a vote on major decisions, and a claim on whatever remains if the company is ever sold or liquidated. If the company earns more over time, the value of your slice grows. If the company earns less, your slice shrinks. There is no cap on the upside and no floor on the downside except zero.

This means stock valuation is fundamentally about the future, not the present. Analysts use a concept called discounted cash flow — you estimate all the profits a company will ever generate, then discount them back to what those future dollars are worth today. A company with zero earnings today but a credible path to massive future earnings can legitimately be worth a great deal right now. Conversely, a company earning steady profits in a declining industry might be worth very little, because those profits will not persist.

Consider a lemonade stand. It earns $10 this summer. If the stand will close next year, you might pay $15 for it. If the owner has a plan to open 500 locations across the country over the next decade, you might pay $10,000 — not for what it earns now, but for what it will earn later.