Functional components in React are JavaScript functions that return JSX, a syntax that looks like HTML but is used by React to describe UI elements. When React calls a functional component, it runs the function body and expects JSX to be returned. React then converts this JSX into real DOM elements and displays them on the screen. This process is simple and direct, making functional components easy to write and understand. If a functional component does not return JSX or returns null, React will render nothing for that component. This visual execution trace shows each step from calling the function to rendering the output, helping beginners see how React handles functional components.