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Quick Take: Just What Is a Basis Point?

One of the many frequently used pieces of Wall Street jargon tossed out at investors by the financial press is the term "basis points." This term is most often bandied about when discussing financial ratios or changes in interest rates.

What is a basis point? Put simply, a basis point is equal to one-hundredth of one percentage point, or 0.01%. Writers use the terminology because it is precise when dealing with small absolute figures. Plus, high-minded terminology makes them sound like cool, seasoned industry insiders.

An example of a headline using this phrase would be "Fed Boosts Rates 25 bps." In English, that means that the Federal Open Market Committee raised its target for the Federal Funds rate by 0.25%. Another example would be if gross margins at Dell fell from 17.8% to 17.1%, you could say that they decreased by either 70 basis points (bps) or by 0.7%.

See, that wasn't so hard! Of course, one explanation of Wall Street jargon always leads to two more questions. For more answers on Wall Street jargon, check out our super-useful Fool's School and its glossary of financial terms, or cruise by Foolish discussion boards Terms, Definitions, and Jargon or Ask a Foolish Question.

Foolish editor Joe Magyer is still chapped that his roommate's sister ate that leftover burger in the fridge. Sure, it was her burger and all, but Joe was soon to move in for the kill. Joe does not own shares in the lone company mentioned in this article, though he notes that Dell is a selection of both Inside Value and Stock Advisor. The Motley Fool has a seasoned disclosure policy.

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