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Discount Rates Explained in 5 Minutes

Everyone in finance keeps mentioning "Discounted Cash Flow Models", "Net Present Value", and "Discount Rates", but what exactly does discounting mean in the stock market when people in the investing/finance community talk about valuation? Well, today we're going to find out. Great investors like Warren Buffett and Charlie Munger emphasizes the importance of valuing companies through a discounted cash flow model by projecting growth of free cash flow 5 years out while also calculating an appropriate discount rate, which helps investors arrive at an intrinsic value. We hear that the intrinsic value of a company is based on the sum of it's future cash flows discounted to the present. But what exactly does that mean? In finance, and specifically the stock market, discount rates are important tools in doing valuations. Because they're such an important tool in valuations, entities like Investment Banks, Private Equity, Private investors, and Retail investors, all rely on the discount rate to base investment decisions. What is a Discount Rate? In corporate finance, a discount rate is the rate of return used to discount future cash flows back to their present value. This rate is often a company’s Weighted Average Cost of Capital (WACC), required rate of return, or the hurdle rate that investors expect to earn relative to the risk of the investment. What is the Stock Market? The stock market is a broad term for the network of exchanges, brokerages, and over-the-counter venues where investors buy and sell shares in publicly traded companies. Though people sometimes use "stock market" to refer to the New York Stock Exchange (NYSE) or the Nasdaq, these exchanges are components of a wider global marketplace. In the United States, the Securities and Exchange Commission regulates companies that want to sell shares to the public. Businesses must register with the SEC and publish periodic disclosures and financial statements. Finance & Investing channels like Hamish Hodder, Plain Bagel, Ben Felix, Benjamin, and many others have covered the discounted cash flow model. This video digs deeper into a complex topic and simplifies it further, in just 5 minutes. Video by: Joe/Nel