What is a Basis Point?
A basis point is one hundredth of a percentage point, or 0.01%. It is used to discuss small fluctuations in equity indexes, interest rates, and yields on fixed annuities. Many financial analysts work with basis points, and you may also hear them referred to in news broadcasts about financial issues. By understanding what, exactly, a basis point is, you can more easily comprehend discussions which might otherwise seem entirely mysterious. There are several advantages to referring to changes in basis points, rather than percentages. The first is that basis points are absolute and clear. For example, one could say equally correctly that interest rates rose 20%, from 5% to 6%, or that interest rates rose 1% from 5% to 6%. This can get a bit confusing, but it’s much more simple when basis points are used, because one can say that interest rates rose by 100 basis points, providing instant clarity. Basis points can also be used to discuss very small increments of change without having to thro
Put simply, a basis point is equal to one-hundredth of one percentage point, or 0.01%. Writers use the terminology because it is precise when dealing with small absolute figures. Plus, high-minded terminology makes them sound like cool, seasoned industry insiders. An example of a headline using this phrase would be “Fed Boosts Rates 25 bps.” In English, that means that the Federal Open Market Committee raised its target for the Federal Funds rate by 0.25%. Another example would be if gross margins at Dell fell from 17.8% to 17.1%, you could say that they decreased by either 70 basis points (bps) or by 0.7%. See, that wasn’t so hard! Of course, one explanation of Wall Street jargon always leads to two more questions. For more answers on Wall Street jargon, check out our super-useful Fool’s School and its glossary of financial terms, or cruise by Foolish discussion boards Terms, Definitions, and Jargon or Ask a Foolish Question. Foolish editor Joe Magyer is still chapped that his roommat
