All real chocolate comes from the cocoa bean, the fruit of a tropical tree, Theobroma cacao. Much of the quality of the chocolate will depend on the origin and quality of the beans.
To make chocolate, processors roast and shell the cocoa beans, leaving only the centers, called nibs. These nibs are then pulverized or ground into a smooth liquid that's called chocolate liquor (although it contains no alcohol). When the chocolate liquor cools, it forms solid blocks.
Chocolate liquor is the basis for all things chocolate. Pure chocolate liquor is very dark and bitter and has only two components—cocoa solids and cocoa butter.
To create eating chocolate, sugar and flavorings are added to the cocoa butter and solids. In the U.S., milk chocolate must contain a minimum of 10% chocolate liquor (though it often contains more) and 12% milk solids. In Europe, milk chocolate must contain 30% chocolate liquor and 18% dry milk solids, as well as 26% total fat. Although popular to eat out of hand, milk chocolate is used less widely in baking than semi- or bittersweet chocolate.