Stock or equity is an ownership interest in a company. That ownership interest provides a right to a portion of the company’s profits based on the number of ownership shares held divided by the total shares outstanding. The profits that are passed on to shareholders are called dividends, and profits that are reinvested into the company for projects that will increase future dividends to shareholders are called “plowed back.”
What is a share of a company worth? In the simplest terms, it is worth the present value of all future dividends accounting for the risks that those dividends don’t materialize divided by the number of shares outstanding. This is known as the dividend discount model of valuation and is the basis for the discounted cash flow models that Wall Street analysts pull together to come up with target prices for a stock.
When you buy a stock, you’re betting that the value of the stock will increase or that the stock will pay you dividends. For the company’s value to increase, it must generate profits and reinvest those profits to create larger dividends in the future. At the end of the day, future dividends are what you are buying.
Less simplistically, a share of a company is also worth whatever someone will pay for it. Different investors have different perceptions of the risk and potential of companies. Ultimately, the value of the stock is at the margin of where one investor believes that the company is going to be more valuable than the current stock price predicts and the next closest investor in the market believes that company is actually less valuable than the current stock price predicts.