Discounted Cash Flow

A dollar today is worth more than a dollar tomorrow. So... money in the future carries a discounted value from what money is worth today. How much it's discounted is called the discount rate, and DCF in particular refers to the way many companies are valued on Wall Street.

Basically, you can decide how much an investment might be worth to you by trying to figure out how much cash flow a business might experience in the future. Finance types use lots of equations and numbers for discount cash flow analysis to figure out exactly how much more (or less) cash flow a company might experience in the future.

It's a science, not an art.

Example

When you buy shares of Facebook at the IPO, there isn't enough cash flow today to justify a very high valuation. But the expectation is that, in the future, the company will generate gobs of cash. Of course, there's risk that the company won't generate the cash and then it'll come in the future, so you have to discount back the value of those streams of cashola.