CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved. CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.

Basis point definition

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.

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Example of a basis point

Changes in prices or rates don’t have to be large to have a significant impact on financial markets, which is why basis points are used to explain changes in percentages that are less than 1%.

For example, central bank interest rate changes often have a major impact on markets, even when the change is just a few basis points. Let’s say that the Federal Reserve is going to increase the interest rate. The current rate is set at 1%, and they have decided on a rise of 30 basis points. This would mean the interest rate has risen by 0.3% – so from 1% to 1.3%.

The same is true for changes in the yield available from certain investments. If $10,000 is invested in an instrument with a yield, then each basis point move would be equal to $1 of profit returned.

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