Defining Basis Points

Course: Investment Planning
Lesson 15: Fundamentals of Derivatives – Futures and Options

Student Question:

Can you please explain what Basis points are and how/why they are generally used?

Instructor Response:

There are 100 basis points in 1%.  Basis points are merely a common method of measuring investment fees or returns.   An exchanged traded fund may charge a management fee of 10 basis points, which would be 1/10 of 1%.    A portfolio manager may earn 25 basis points higher than the S&P 500 index.  That just means that the manager earned ¼ of 1% more than the S&P 500 index return.