======Basis Points======
Basis Points (often abbreviated as **BPS** and sometimes called "bips") are a standard unit of measure used in finance to express tiny changes in percentages, especially concerning [[interest rate]]s and investment fees. Think of it as a precision tool for percentages. One basis point is equal to one-hundredth of one percent (1/100th of 1%), or 0.01%. This means 100 basis points are equal to a single [[percentage point]]. For example, if an interest rate moves from 5.00% to 5.25%, it has increased by 25 basis points.
The main reason finance professionals love basis points is for clarity. If someone says an interest rate "increased by 1%," the statement is dangerously ambiguous. Do they mean the rate went from 5% to 6% (an absolute increase of one percentage point)? Or did it go from 5% to 5.05% (a relative increase of 1% *of* the original 5%)? This confusion could lead to costly mistakes. By using basis points, there's no room for error. A "100 basis point increase" always means a one percentage point jump, from 5% to 6%. This precision is essential where even the smallest fluctuations can have massive financial consequences.
===== Where You Will See Basis Points =====
Basis points pop up everywhere in the investment world. Understanding them helps you decode financial news and, more importantly, make smarter decisions with your money.
==== Central Banks and Bonds ====
When you hear that the [[Federal Reserve]] (the Fed) in the U.S. or the [[European Central Bank]] (ECB) has changed its policy rate, the announcement is almost always made in basis points.
  * A "25 basis point hike" means the rate was increased by 0.25%.
  * A "50 basis point cut" means the rate was lowered by 0.50%.
These changes directly influence the [[yield]] on [[bond]]s. The difference in yield between two different bonds—known as the [[spread]]—is also quoted in basis points. This allows investors to quickly gauge the difference in risk and return between, for example, a government bond and a corporate bond.
==== Investment Fees and Expenses ====
This is where basis points hit home for the everyday investor. The fees for [[mutual fund]]s and [[ETF]]s (Exchange-Traded Funds) are expressed as an [[expense ratio]]. While often shown as a percentage, thinking in basis points reveals the true impact of costs.
  * A low-cost index fund might have an expense ratio of 0.05%, which is just **5 basis points**.
  * An actively managed fund might charge 1.25%, which is **125 basis points**.
Framed this way, it's clear that the second fund is //25 times// more expensive. A few bips might seem insignificant, but over decades of investing, they can consume a shocking portion of your potential returns.
===== A Value Investor's Perspective =====
The philosophy of [[value investing]] is built on a foundation of discipline, patience, and a relentless focus on what you can control. You can't control the market, but you **can** control your costs.
Understanding and minimizing costs, right down to the last basis point, is a core tenet of a successful investment strategy. Every basis point paid in fees is a basis point that is not compounding in your account. As the legendary investor John Bogle, founder of Vanguard, emphasized, the "tyranny of compounding costs" can be devastating over the long term. A seemingly small 50 basis point difference in annual fees can reduce your final nest egg by hundreds of thousands of dollars over an investing lifetime.
//In short: Pay attention to the bips. They matter more than you think.//