What is a basis point?

A basis point is one hundredth of a percentage point, so 100 basis points make one percentage point and 25 basis points make a quarter of one. It is a unit of measurement, not an amount of money, and it exists so people can talk about small moves in rates and fees without being misunderstood. You meet it most often when interest rates change, since a cut is almost always announced in basis points.

A central bank holding rates at 4% announces a cut of 25 basis points, which means the rate is now 3.75%. Reading that as a quarter of a percentage point is all the arithmetic there is, and 50 basis points would be half a point, 100 a full point. So why bother, when everyone already understands percentages? Because saying a rate fell by 1% is genuinely ambiguous: it can mean the rate went from 4% to 3%, or that it fell by one hundredth of its own value, from 4% to 3.96%. When the number being changed is itself a percentage, ordinary percentage language stops being precise, and on large sums the difference between those two readings is enormous. Basis points remove the ambiguity, because they always count in fixed hundredths of a point rather than in shares of whatever number came before. They also make small differences legible, which is why fund fees are quoted this way: 0.03% and 1.00% both read as roughly nothing, while 3 basis points against 100 basis points shows the charge is over thirty times larger.

Your phone battery is sitting at 40%, and someone tells you a new setting will improve it by 10%. That could mean the battery now reads 50%, ten points higher than before, or that it reads 44%, a small improvement on the 40 you had. The confusion exists because the thing being changed is itself measured in percent, so one word is doing two jobs with no way to signal which. Basis points give the number a single job: 100 basis points moves that 40 to 41, whatever the 40 happens to be measuring.