Editing Stock duration (section)

== Duration in the discounted cash flow model ==
<div style="float:right; padding:1em; margin:0 0 0 1em; width:325px; border:1px solid; background:#e8ffff; font-size:small">
{{center|'''<big>Present value of a stock</big>'''}}
The ''present value'' or value, i.e., the hypothetical fair price of a stock according to the Dividend Discount Model, is the sum of the present values of all its dividends in perpetuity.  The simplest version of the model assumes constant growth, constant discount rate and constant dividend yield in perpetuity. Then the present value of the stock is

*<math>P=\frac{D}{(r-g)}</math>
where

P is the price of the stock

D is the initial dividend amount

r is the periodic discount rate (either annual or quarterly)

g  is the dividend growth rate (either annual or quarterly corresponding to r)

The requisite assumptions are hardly ever true in perpetuity, so the computed value is highly hypothetical.
</div>

In the Discounted Cash Flow Model (DCFM) of security analysis, the value of a security is the present value of all its future cash flows including interest or dividends and the implied cash flow of the residual value of the security itself, if any. A special case of the DCFM, based on a stock's dividend, is called the Dividend Discount Model.  Under that model, the value of a stock depends on how long we expect to receive dividends, their cash amounts, spacing (usually monthly, quarterly or semiannually), and a hypothesized long term discount rate that incorporates inflation in the currency and risk on the firm's payouts. The duration of the stock is how long we need to receive dividends for the present value of the dividends plus the residual value of the stock to total to the price paid.  Conceptually, it corresponds to the duration of a bond but the duration of a bond is deterministic and that of a stock is not. It is not necessary for the dividends to be reinvested – that's a separate risk, reinvestment risk, and does not affect the risks and therefore the value of the stock.

If a stock does not pay a dividend or pays a very low dividend, alternatively, analysts may use a firm's free cash flow taking into account any necessary capital expenditures, to approximate what distributable cash could be available to shareholders.

Low interest rates shorten duration because the present value of near term cash flows is relatively greater; high interest rates lengthen duration because we're more reliant on deeply discounted cash flows in the far future.

The duration of the U.S. stock market represented by the S&P 500 for example (or other broad index) as well as most individual stocks, is many years to several decades. Generally, higher price/earnings and other equity multiples imply longer duration and greater risk that the implied cash flows may not arrive as expected.