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What are Basis points in Stock Market? Explained

Basis points in Stock Market_Kuvera

The markets plunged by so-and-so points! The markets zoomed by ‘x’ points! 

 

You might have come across these stories while investing. Buy what are these points? Points or basis points (BPS) are a unit of measurement used in finance to describe the percentage change in the value of financial instruments or interest rates. One basis point is equal to one-hundredth of a percentage point, or 0.01%. This means:

 

 

Importance of Basis Points

 

Understanding basis points is essential for investors, financial professionals, and anyone involved in financial markets.

 

1. Precision in Communication

 

Financial markets often deal with very small percentage changes. Using basis points allows for greater precision and avoids confusion when discussing changes that may be less than one percent. In complex instruments like derivatives, fixed-income securities and loans, even slight changes can have significant impacts. BPS offers a way to articulate these changes clearly.

 

2. Standardisation:

 

Basis points provide a standardized unit of measurement that is universally understood in the financial industry. This consistency facilitates better communication among financial professionals, investors, and analysts.

 

Where are Basis Points Used?

 

1. Interest Rates

 

Basis points are commonly used to discuss changes in central bank interest rates, mortgage rates and other borrowing costs. For example, if a central bank raises rates by 50 basis points, it indicates a 0.50% increase or if a bank offers an interest rate on a savings account of 2.00% and then increases it to 2.50%, this is a change of 50 basis points.

 

2. Bond Markets

 

In the bond market, yields and spreads (the difference between yields on different securities) are often expressed in basis points. For instance, if a bond’s yield increases from 3.00% to 3.50%, it has risen by 50 basis points.

 

3. Investment Management

 

Fund management fees, performance metrics and expense ratios are frequently expressed in basis points. A mutual fund with a fee of 100 basis points charges 1% of assets annually.

 

4. Foreign Exchange (Forex)

 

Changes in currency exchange rates may also be discussed in basis points, especially when evaluating the relative strength of currencies.

 

5. Risk and Credit Spreads

 

Basis points are used to describe risk premiums in credit spreads, helping investors assess the additional yield required for taking on extra risk compared to a benchmark (like government bonds).

 

6. Economic Reports

 

Economic indicators, such as changes in inflation or unemployment rates, may sometimes use basis points to express shifts in related metrics.

 

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Historical Journey of Nifty and SENSEX

 

The Nifty 50 and SENSEX are two of the primary stock market indices in India, representing the performance of the largest companies listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) respectively. Their journeys reflect significant economic developments and market trends over the years and basis points (BPS) can be used to describe changes in their values, particularly in the context of interest rates, economic indicators and market fluctuations.

 

1. Launch and Early Years

 

2. 2000s Bull Market

 

 

3. Global Financial Crisis (2008)

 

 

4. Recovery and New Highs (2010s)

 

 

5. Recent Developments (2020 – Present)

 

 

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Wrapping Up

 

The journeys of Nifty and SENSEX illustrate the evolution of the Indian stock market over several decades. Basis points play a crucial role in understanding the impact of monetary policy, market fluctuations and economic indicators on these indices. Monitoring these changes helps investors gauge market sentiment and make informed decisions.

 

 

 

Interested in how we think about the markets?

Read more: Zen And The Art Of Investing

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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.

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