Investor Facts: What Is A Basis Point?

Posted on November 24, 2017 at 6:32 AM PST by

A basis point is a mathematical term that means 1/100th of 1%.

Basis points are a way to discuss hundredths of a percent. If you cut 1% into a hundred equal pieces, each piece would be one basis point.

Accordingly, 50 basis points is half of 1%. One hundred basis points is 1%. Investor need to understand basis points in order to understand the difference in a bond return or the cost of an investment service.

basis point

Real estate loans and other forms of long-term lending also use basis points to express the cost of borrowing. Currency and options traders use basis points to compare investment propositions, since large-dollar transactions can have a big impact even at the sub-1% level of calculation.

Most ordinary investors will hear basis points cited in terms of an investment expense ratio. For instance, a mutual fund charging 1.25% per year in expenses is said to have a 125 basis point expense ratio.

Basis points are also used to describe a management fee. An investment advisor charging three-quarters of 1 percent per year could be said to have a 75 basis point management fee.

Finally, basis points are used to quantify a change in the yield of a bond.

If for instance the yield changes by half of 1 percentage point, that’s  50 basis points. If it changes by 1 percent — going from 3% to 4%, for instance — that’s a 100 basis point change.

Figuring fees

Basis point math in regard to investment fees can be applied by figuring out 1% of a specific dollar amount, then dividing.

For example, if you have a portfolio worth $100,000 and pay your financial advisor a 75 basis point fee, first calculate 1% of $100,000. Of course, it’s $1,000.

Since 1% equals 100 basis points, now you know that your cost in dollar terms for managing that portfolio will be 75% of $1,000, or $750 per year.

In financial services, investment personnel will express this in writing with the abbreviation “BPS” or verbally as “bips” or “beeps.”

They’re still talking about hundredths of 1%, regardless of the context of the discussion.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

You may like these other MarketRiders articles: