Advanced Diploma of Financial Planning (ADFP) Practice Test

What is one of the potential benefits of owning common stock?

1. Guaranteed fixed income

2. Potential for capital appreciation

3. Immediate tax benefits

4. Exemption from market fluctuations

The correct answer is: Potential for capital appreciation

Owning common stock offers the potential for capital appreciation, which refers to the increase in the value of the stock over time. This can occur as the company grows and becomes more profitable, leading to a rise in its stock price. Investors benefit by being able to sell their shares at a higher price than what they paid, resulting in a profit. This potential for growth is one of the distinguishing features of common stock, as it allows shareholders to participate in the company's success. It is important to note that, unlike fixed-income securities such as bonds, common stocks do not guarantee returns and are subject to market risks, but the opportunity for significant returns through appreciation is a compelling reason for investors to consider common stocks as a part of their portfolio.