Stock prices look random on a daily chart — bouncing up and down, sometimes dramatically, in response to news and noise. But underneath that volatility, prices are anchored by something concrete: the market's estimate of what a company's future cash flows are worth today.
At the most fundamental level, a stock is worth the present value of all the cash it will ever generate for its shareholders — dividends paid and ultimately the value you can sell the shares for. This concept, called intrinsic value, is what professional investors try to estimate through financial modelling.
Several factors drive the market's view of this value. Earnings and earnings growth are central: a company growing profits at 20% per year is worth more than an identical one growing at 5%. Profit margins matter — how efficiently does the company convert revenues into earnings? Return on equity — how well does management deploy the capital shareholders provide? All of these affect the earnings the company generates per share.
The discount rate applied to those future earnings matters enormously. This is partly determined by interest rates: when rates are low, future cash flows are worth more today; when rates are high, they are worth less. It also reflects the perceived risk of the business — a highly uncertain startup is discounted more heavily than a stable utility.
Growth expectations play a huge role. Much of what investors pay for a stock today is based on what they expect to happen in the future, not what is happening now. This is why technology stocks can trade at very high multiples of current earnings — investors are paying for growth they expect to materialise years hence.
On a day-to-day basis, prices also respond to supply and demand: how many people want to buy versus sell at any given moment. Sentiment, news flow, and market trends cause short-term deviations from fundamental value. Over time, however, prices tend to gravitate back toward what the underlying business is worth. As Benjamin Graham put it: in the short run, the market is a voting machine; in the long run, it is a weighing machine.