What is a basis point?
A basis point is a unit of measurement used to quantify the change between two percentages – it can also be referred to as ‘bp’, which is pronounced ‘bip’ or ‘beep’. A basis point is equal to one hundredth of one percent, or 0.01%.
This means that a 0.01% change is a one-bp move, a 1% change is a 100-bp move, and a 10% change is a 1000-bp move.
Basis points are commonly used to define interest rates, quote price changes in the stock market, and outline the cost of exchange-traded funds and mutual funds. They help traders and analysts clarify the change between two percentages – instead of saying a 10% increase on a 10% rate, it can be described as a 1000 bps change. By creating a universal measure, any confusion over movements in prices and interest rates is eliminated.