Advanced Diploma of Financial Planning (ADFP) Practice Test

The focus of growth stocks lies in companies that are increasing their market share significantly. These companies typically reinvest their earnings into the business to fuel further growth, rather than paying out dividends to shareholders. As a result, investors buy growth stocks with the expectation that these companies will achieve substantial sales and earnings growth over time, ultimately leading to an increase in the stock price.

This growth potential is often assessed through various metrics, such as revenue growth rates and future earnings potential, which are indicators that the company is capturing a larger portion of its target market. Growth stocks may operate in emerging industries or sectors with high demand, making them appealing to investors looking to capitalize on performance above the general market trends.

On the other hand, companies with declining sales, those paying high dividends, or those involved in speculative ventures do not align with the fundamental characteristics of growth stocks. Companies with declining sales are often seen as value stocks or distressed assets, while high-dividend payers are typically categorized under income stocks. Speculative ventures may offer high risk and the potential for large returns, but do not necessarily follow the consistent growth strategy that defines true growth stocks.