Where does that price come from?

It comes from two places: (1) earnings expectations and (2) the present value the market is willing to place on those earnings expectations. Think of a stock as representing a small piece of ownership in an estimated future stream of earnings. Those earnings are unknown, and investors rely on the best guesses of Wall Street analysts to determine what they’ll be. When you buy a share of stock today, you’re buying a stake in that future earnings stream.
Of course, analyst estimates of that future earnings stream may be wildly off the mark, which adds another major variable to the question of determining value. But let’s assume, charitably, that the analysts are going to get it right and you know precisely what a company will earn over the next 10 years.
Even so, you would have only half the equation because the next question would be: What is that future earnings stream worth today? What the market is willing to pay for a given level of earnings is the price/earnings ratio. And if you think predicting earnings is difficult, you haven’t seen anything yet.
The stock market at various points along the way has decided that stocks were worth anywhere from six times earnings (in 1949) to as much as 28 times earnings in 1998. And that ratio has gyrated wildly along the way, rising and falling sharply, so that a stock earning $2 per share could be worth $40 one year and only $20 the following year. Same company, same earnings—but a wildly different con-cept of value.