Advanced Diploma of Financial Planning (ADFP) Practice Test

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Prepare for the Advanced Diploma of Financial Planning Test. Study with flashcards and multiple choice questions, receive explanations for each answer. Get exam-ready now!

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What defines growth stocks?

Stocks with consistent dividend payments
Stocks from companies with slower earnings growth
Stocks from companies experiencing higher growth rates than average
Stocks that are actively traded

The correct answer is: Stocks from companies experiencing higher growth rates than average

Growth stocks are characterized by companies that are expected to grow at an above-average rate compared to their industry or the overall market. These companies typically reinvest their earnings into the business to fuel further development and expansion rather than returning profits to shareholders through dividends. This reinvestment strategy often positions them to achieve higher growth rates, making them attractive to investors looking for capital appreciation rather than income from dividends. The other options highlight traits that do not align with the essence of growth stocks. For example, consistent dividend payments are more commonly associated with dividend-paying or income stocks, and slower earnings growth conflicts with the definition of growth stocks, which thrive on rapid growth. Lastly, while actively traded stocks might include growth stocks, trading volume is not a defining characteristic of what constitutes a growth stock.