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Time value

Time value is the time an investor must wait to realize the returns on an investment.

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Expanded Definition

Time value is arguably one of the most important concepts in investing, and if you take a finance class in college, it will be topic #1. The reason is that we all know that $1 today is worth far more to us than $1 that would be delivered to us in 5 years time. The question is: How much more?

When you figure out the answer to that question by finding the present value of that $1 by employing a discount rate, you will know how much you should pay today to own the right to get $1 in 5 years.

When you apply this concept to investing, you can determine the present value of a company's stream of cash flows and compare it to the market price of the stock. Thus, using a discounted cash flow equation, you can determine if the market price for a company over- or undervalues that company's operations and assets.

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