Basic Points

• For percentages, we say basis point. This is equal to 0.01% (or one hundredth of a percent), which is worth 0.0001x of its full amount. 
• In trading, everything has to do with numbers. When a security’s price changes by a round number we call that a point. 
• But for the sake of standardization, since different stocks or indices have different base and notional values, it often makes more sense to express changes in percentage terms rather than dollar terms. That is why we use basis points with each point being a percentage. The same convention is used in theoretical pricing models.

All Levels: Real-World Example

Lately, with all the excitement around interest rates, speaking in basis points has become more popular, with it being the measure to speculate on interest rate hikes. For example, in 2022 we had several 75bp hikes (+0.75%), but to start out January 2023, we had a basis point hike of 25. This is standard terminology for expressing changes in rates, yields, or the pricing of financial derivatives such as futures and options.