Lesson 1

A stock is a claim

Before a contract about a stock can mean anything, the stock itself has to mean something.

A share of ACME is a small claim on a real business. If the business is worth more tomorrow, the claim is worth more. If it is worth less, so is the claim.

That is the whole model we need. We are not valuing ACME. We are watching its price move so we can talk about promises written on that price.

Buy one share at $100. Downside stops at −$100. Upside does not stop.

Two facts travel with every share:

You can lose the whole price you paid. A $100 share can go to $0. It cannot go below $0.
Your upside is not capped by the share itself. The business can, in theory, keep getting more valuable.

Hold that shape in your head. A call is a bet that this claim goes up. A put is a bet that it goes down. Neither one is a stock. Both of them are sentences about a stock.