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Time value

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

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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