Basis Points (BPS)
A basis point is a small unit used to describe changes in percentages, especially interest rates, yields, and fees. One basis point equals one one-hundredth of a percentage point, so it takes 100 basis points to make up 1%.
The reason this unit exists is that percentages themselves can be confusing at small scales. If a bond yield moves from 5.00% to 5.05%, saying it "rose five basis points" is clearer and less error-prone than saying it rose "0.05 percentage points" or, worse, "1%" (which would actually mean a much bigger relative jump). Basis points strip out that ambiguity by giving every small move its own whole-number scale: 1 basis point = 0.01%, 10 basis points = 0.10%, 100 basis points = 1.00%.
Basis points show up constantly in fixed income (bond yields, credit spreads), central bank rate decisions, mutual fund and ETF expense ratios, and margin or financing rates charged by brokers. They're also used loosely in equities and options to describe small percentage moves in an index or the cost of a spread, though in stocks people just as often speak in plain percentages.
The nuance that trips people up is the difference between a percentage-point change and a percentage change. Going from a 4% rate to a 5% rate is a 100 basis point (1 percentage point) increase, but it's also a 25% relative increase in the rate itself. Basis points always refer to the flat, percentage-point difference, not the relative change.
Day traders who touch bonds, rate-sensitive futures, or the forex market watch central bank announcements in basis points because a 25 bp versus 50 bp rate move can trigger sharply different reactions in currencies, index futures, and volatility.
A trader watching the Fed decision sees the target rate move from 5.25% to 5.50%. That's a 25 basis point hike. If the market had priced in a 50 basis point hike instead, the smaller-than-expected move could send rate-sensitive futures and currency pairs sharply higher on the "surprise" of easier-than-feared policy.
Learn it by trading it.
Every term in this glossary shows up daily on our live desk.
Watch a morning, free