What Is a Basis Point? Definition and CFD Impact
In this article
- What Is a Basis Point?
- How to Convert Basis Points to Percentage Points
- Why Do Basis Points Matter for CFD Traders?
- Basis Points vs Forex Pips: What Is the Difference?
- Risks and Common Mistakes When Using Basis Points
- What Is a Basis Point? Summary and Takeaways
- Frequently Asked Questions
- Browse All Education
A basis point (bp) is a financial unit equal to 0.01 percentage points, or 0.0001 in decimal form. Financial markets use basis points to describe small changes in interest rates, bond yields and other percentage-based measures clearly and precisely.
A basis point, often abbreviated to bp or bps, is a unit used to measure small changes in percentages. One basis point equals 0.01 percentage points, or 0.0001 in decimal form. This means that 100 basis points equal one percentage point.
So, what is a basis point, really? It's commonly used when discussing interest rates, bond yields and other percentage-based financial measures. For CFD traders, they can also be useful when assessing interest-rate decisions and changes in benchmark rates that may affect markets and, for some CFD products, overnight funding costs.
Quick Takeaways
- 1 basis point = 0.01 percentage points = 0.0001 in decimal form.
- 100 basis points = 1 percentage point.
- Basis points make small changes in interest rates and yields easier to communicate without ambiguity.
- Changes in benchmark interest rates can affect overnight funding on some CFD positions, although the calculation varies by product and broker.
- A basis point is different from a Forex pip. A basis point measures a percentage-point change, while a pip measures a standardised movement in a currency pair's exchange rate.
What Is a Basis Point?
A basis point is one-hundredth of a percentage point.
Basis points | Percentage-point change |
|---|---|
1 bp | 0.01 |
25 bps | 0.25 |
50 bps | 0.50 |
100 bps | 1.00 |
Financial markets use basis points because they make small changes in percentage rates easier to describe precisely.
Suppose a central bank's benchmark interest rate is 2.00%. Saying that the rate has increased by "1%" can be ambiguous. It could mean either:
- an increase of one percentage point, taking the rate from 2.00% to 3.00%; or
- a 1% relative increase in the existing rate, taking it from 2.00% to 2.02%.
Saying that the rate has risen by 100 basis points removes this ambiguity: the rate has moved from 2.00% to 3.00%.
How to Convert Basis Points to Percentage Points
Converting basis points is straightforward.
- Basis points to percentage points: divide by 100.
- Formula: Percentage-point change = Basis points ÷ 100
- Example: 75 bps ÷ 100 = 0.75 percentage points
- Percentage points to basis points: multiply by 100.
- Formula: Basis points = Percentage-point change × 100
- Example: 0.25 percentage points × 100 = 25 bps
- Basis points to decimal: divide by 10,000.
- Formula: Decimal = Basis points ÷ 10,000
- Example: 50 bps ÷ 10,000 = 0.005
Basis Points (bps) | Percentage-Point Change | Decimal Value | Example Context |
|---|---|---|---|
1 bp | 0.01 | 0.0001 | Small change in a yield or interest-rate spread |
10 bps | 0.10 | 0.0010 | Small change in an interest rate or yield |
25 bps | 0.25 | 0.0025 | Common size of a central bank rate change |
50 bps | 0.50 | 0.0050 | Larger interest-rate change |
100 bps | 1.00 | 0.0100 | One full percentage-point change |
Why Do Basis Points Matter for CFD Traders?
Basis points are particularly common in fixed-income and interest-rate markets, but you'll come across them too if you follow monetary policy, benchmark rates or financing costs.
1. Central Bank Decisions and Market Volatility
Central banks such as the Federal Reserve, Bank of England and European Central Bank often describe changes in policy rates in basis points. For example, a central bank might cut its policy rate by 25 bps or raise it by 50 bps.
Interest-rate decisions can affect currencies, equity indices, bonds and other financial markets. The size of the market reaction depends not only on the rate change itself but also on what investors expected beforehand and on the central bank's guidance about future policy.
2. Overnight Funding Costs
Some cash CFD positions held overnight are subject to a daily funding adjustment. Depending on the broker and product, the calculation may use a relevant benchmark interest rate plus or minus an administration charge or broker adjustment.
For example, if the benchmark used in a particular CFD's funding calculation rises by 25 bps, the annualised funding rate may also change. However, the exact effect depends on the broker's formula, whether the position is long or short, and the market being traded.
Forex CFDs can be treated differently. Some brokers calculate overnight Forex funding using tom-next rates, which reflect the interest-rate differential between the two currencies, rather than applying the same benchmark-rate formula used for other cash CFDs.
Funding is normally calculated on the full notional value of a leveraged position, not just the margin you've deposited. That's why small changes in annualised funding rates can add up if you hold a position for a while.
3. Interest Rates, Yields and Market Spreads
Basis points are also widely used to describe changes in bond yields and interest-rate spreads.
For example, if the difference between two yields moves from 1.20% to 1.25%, the spread has widened by 5 basis points.
This should not automatically be interpreted as a 0.05% increase in the bid–ask spread or CFD transaction cost. CFD spreads are quoted according to the broker and underlying market, and their relationship with basis-point movements depends on the specific instrument.
Basis Points vs Forex Pips: What Is the Difference?
New traders sometimes confuse basis points with Forex pips. Both describe relatively small movements, but they measure different things.
Feature | Basis Point (bp/bps) | Pip |
|---|---|---|
What it measures | A change in a percentage rate | A standardised movement in a Forex exchange rate |
Size | 1 bp = 0.01 percentage points | Usually 0.0001 for most major currency pairs |
Common use | Interest rates, bond yields and percentage spreads | Forex price movements and spreads |
Example | 4.00% to 4.25% = 25 bps | EUR/USD 1.1000 to 1.1001 = 1 pip |
JPY convention | Not applicable | Usually 0.01 for yen pairs |
A basis point is therefore a unit for expressing percentage-point changes. A pip, by contrast, is a unit used to describe movements in Forex exchange rates.
Risks and Common Mistakes When Using Basis Points
Understanding basis points can help avoid errors when interpreting interest rates and trading costs.
- Confusing percentage changes with percentage-point changes: If an interest rate rises from 4.00% to 5.00%, it has increased by 100 basis points, or one percentage point. Relative to the original 4.00% rate, however, the increase is 25%.
- Assuming a benchmark-rate change produces an identical change in every CFD funding charge: Funding calculations differ between brokers, markets and long and short positions. Forex CFDs may also use a different calculation method.
- Looking only at the margin deposit when assessing funding costs: CFD funding may be calculated using the notional value of the position. As a result, the cost relative to the margin committed can be more significant than the annualised rate initially suggests.
Example: Why 25 Basis Points Can Still Matter
Suppose a trader has a CFD position with a notional value of £20,000 and the applicable annualised funding rate increases by 25 bps, or 0.25 percentage points.
Ignoring broker-specific adjustments and other charges for illustration:
£20,000 × 0.25% = £50 per year
That is approximately £0.14 per day using a 365-day calculation.
The additional daily amount is small, but it accumulates while the position remains open. The actual funding charge may differ because brokers use their own rates, adjustments, day-count conventions and product-specific formulas.
What Is a Basis Point? Summary and Takeaways
A basis point is a standard financial unit equal to 0.01 percentage points, or 0.0001 in decimal form. It provides a precise way to describe relatively small changes in interest rates, bond yields and other percentage-based measures.
Once the basis point meaning clicks, following central bank decisions and understanding changes in benchmark interest rates becomes much easier for CFD traders. Those changes may also affect overnight funding on some CFD positions, although the exact calculation depends on the broker and product.
Understanding basis points alongside leverage, trading costs and the mechanics of CFD trading can make it easier to assess the potential cost of keeping leveraged positions open.
This article is for educational purposes only and does not constitute financial advice. Trading CFDs and other leveraged products involves risk, and losses can occur quickly. The Financial Conduct Authority (FCA) provides further information on CFDs and the risks they pose to retail consumers. Always consider your own circumstances and seek professional advice if needed.
FAQ
What Does 1 Basis Point Equal in Percentage Terms?
One basis point (bp) equals 0.01 percentage points, or 0.0001 in decimal form. To convert basis points into percentage points, divide the number of basis points by 100. For example, 50 basis points equal 0.50 percentage points.
How Many Basis Points Make Up 1 Percentage Point?
There are 100 basis points in one percentage point. For example, if an interest rate rises from 4.00% to 5.00%, it has increased by 100 basis points, or one percentage point.
Is a Basis Point the Same as a Forex Pip?
No. A basis point measures a change of 0.01 percentage points, while a pip measures a standardised movement in a Forex exchange rate. For most major currency pairs, one pip is 0.0001, while for pairs involving the Japanese yen it is usually 0.01.
What Does a 25 Basis Point Rate Cut Mean?
A 25 basis point rate cut means a central bank has reduced its policy or benchmark interest rate by 0.25 percentage points. For example, a cut from 4.50% to 4.25% is a reduction of 25 basis points.
How Can Basis Point Changes Affect CFD Overnight Funding Costs?
Changes in benchmark interest rates can affect overnight funding costs on some CFD positions. However, the effect is not necessarily proportional to a central bank rate change. It depends on the product, the relevant benchmark, the broker's funding calculation and whether the position is long or short. Forex CFDs may also use different funding methods, such as tom-next rates.
