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A Dream Caster is someone with the ability to use magic to plant dreams in the minds of people. The novels first talk about Dream Casters in Chainfire, when Richard goes to Caska and meets Jillian. There we learn that Dream Casters have been practicing their magic for thousands of years (long before the Wizards of the Old World created Dream Walkers in the Great War). The Wizards of the Great War later used the same kind of magic to create the first Dream Walker.
The Dream Casters cast dreams by sitting in a spell form and concentrating on the dreams that they want to cast. The dreams are then planted into an animal who would then spread the dreams to any people that it got within close proximity to.
Although the exact nature of the dreams is not known, except that they were somehow able to scatter enemy invaders, we know that they were not nightmares. When Richard helps Jillian send dreams, he instructs her to think of nightmares to cast to the soldiers of the Imperial Order encampment out on the Azrith Plains. They use a Raven named Lokey as the medium through which the nightmares are spread to the army. These nightmares cause Jagang's lustful obsession for Nicci to be amplified by nightmares he has about her, which later enables Nicci to snare Jagang in a Rada'Han and kill him. The nightmares also cause a general level of uneasiness in the camp, due to the fact that many of the soldiers aren't able to sleep at night.