Have you ever come across Financial or Analyst reports with an opening line: “THE NIGERIAN INDEX GREW BY 10 Basis Points... and all that comes to your mind are "WHAT?" or "Okay?" and you have a faintest idea of what they are speaking about?
The Good News is that you are not the only one feeling this way.
So what does it all mean and how can one make sense of it when next you come across the "Basis Point" financial jargon.
Basis point has a fundamental definition, but has a tremendous amount of applications. So it could mean one thing to a Banker who deals with interest rates and mean something totally different to an Investors who deals in stocks and market index movements.
Our Goal is to provide a very simple definition of the term as it relates to you as an investor in the Nigerian Capital Market.
From a technical perspective, Basis point (BPS) is really a financial unit of measurement that describes the percentage change in value of a security. It is really used to describe small fluctuations in equity indexes. This unit of measurement is 1/100 of a Percentage (0.01%) Instead of counting in 1's or 10's, because the change is so small, you can count in basis point.
In layman's terms, it is an easier way to describing a change in equity indexes. If an index, or price moves upwards from 23003.57 to 23,019.16, you can either describe the change as an upward percentage movement of 0.067% or convert it into basis points and restate a 6.7 or 7 basis point movement. The lower the basis point number, it means a smaller change or fluctuation in equity index.
Simple Math Approach:
Find the Delta Change
23,019.16 – 23,003.57 = 15.59
Calculate Percentage Change:
(15.59/23,003.57) x 100 = 0.067
Convert to Basis Points
0.067 * 100 = 6.7 Basis Point
Now some Analyst may have certain criteria they watch for in basis points. Some may state, a double digit movement in basis point is significant while others may not be so concerned.
When speaking to your broker or reading a report from your broker, you may want to have an idea of what they consider a small or huge change and what set of rules they use to arrive at their conclusion.
Once again...A MonGran Perspective