What a stock really is
A share is a tiny slice of a business. Its value comes from the profits that business will make for its owners.
Start with a lemonade stand
Say you and four friends start a lemonade stand. You split ownership into 100 shares, 20 each.
This summer the stand makes $1,000 profit after paying for lemons, sugar and cups. Each share's slice of that profit is $1,000 ÷ 100 = $10.
Now a neighbor wants to buy one of your shares. What's a fair price?
- If the stand will make $1,000 every summer for years, a share is worth a lot more than $10. You'd be giving up $10 every year.
- If the stand is about to lose its corner to a coffee shop, maybe it's worth less than $10.
- If the stand also has $500 in a jar, that cash belongs to the owners too. That's $5 per share.
That's valuation in miniature. The price depends on future profits, how reliable they are, and what else the business owns or owes.
A real company works the same way
Costco has about 444 million shares. In its fiscal year ending August 2026 it earned $9.226 billion. Divide one by the other and each share's slice was about $20.76. That number is called earnings per share, and it's the subject of Lesson 4.
Whether a Costco share is "worth" $500 or $1,500 depends on the same questions as the lemonade stand: how much will it earn in the future, how sure are we, and what's on its balance sheet.
How owners get paid
Profit doesn't land in your bank account automatically. A company can do three things with it:
| Option | What happens | Example |
|---|---|---|
| Reinvest | Build stores, factories, products. Aims to make future profits bigger. | Costco opening new warehouses |
| Pay a dividend | Send cash straight to shareholders. | Costco's quarterly dividend |
| Buy back shares | Shrink the share count so each remaining share owns a bigger slice. | NVIDIA returned $41.1B through buybacks and dividends in fiscal 2026 |
All three can create value. Reinvesting is only good if it earns a decent return. That's a Level 2 topic.
Why prices move every day
The business doesn't change much from Tuesday to Wednesday. The share price can. That's because the price reflects what buyers and sellers expect, and expectations shift with news, interest rates, fear and excitement.