Basis Point (bps)

Ever heard a news anchor say "the Fed raised rates by 25 basis points" and wondered what that actually means? A basis point (abbreviated "bps" and pronounced "bips") is just 0.01%. So 100 basis points = 1%, 50 basis points = 0.50%, and 25 basis points = 0.25%.

The reason this unit exists is to avoid confusion. If your mortgage rate goes from 6.50% to 6.75%, saying "it went up 0.25%" is unclear—does that mean 0.25 percentage points, or 0.25% of 6.50%? Saying "25 basis points" removes all doubt.

You'll run into basis points most often in three places: Federal Reserve rate decisions (the Fed typically moves in 25 or 50 bps increments), bond yields (where small shifts significantly impact bond prices), and investment fund expense ratios (where the difference between 5 bps and 50 bps compounds enormously over decades).

Here's why those tiny-sounding numbers matter to your wallet. On a $500,000 portfolio, a 50 basis point difference in annual fees means $2,500 per year—and over 30 years with compounding, that fee gap can cost you over $150,000 in lost returns. That's why low-cost index funds (typically 3-10 bps) are so much more efficient than actively managed funds (typically 50-150 bps).