Common stock represents an ownership interest in a business. A business in its operations generates a stream of cash flows, and as owners of the business, common stockholders have an equity ownership claim on those future cash flows. Beginning with John Burr Williams, analysts have developed this insight into a group of valuation models known as discounted cash flow (DCF) valuation models. DCF models, which view the intrinsic value of common stock as the present value of its expected future cash flows, are a fundamental tool i both investment management and investment research.
Several alternative streams of expected cash flows can be used to value equities, including dividends, free cash flow, and residual income.
