Since basis points express percentages of change, not dollars, they have limited use in quoting stock prices. Primarily used with debt instruments, such as bond yields or loan interest rates, one basis point equals one one-hundredth of a percent or 0.01 percent. You might find it easier to monitor stock prices as dollar changes. However, when you want to track percentage changes, calculating basis points and converting them to percentages is equally simple.
A stock basis point is a measurement of change that are primarily used in relation to bond yield and loan interest rates.
Creating a Definition for Equities
Stocks are equities, giving the stock owners an ownership stake in the issuing company. Global stock markets quote prices in their local currency, such as dollars, yen, euros, etc. Since no interest rates apply to equity securities, such as stocks, basis points are less commonly quoted in price evaluations. Basis points, however, are useful in stating percentage changes, up or down, in prices of individual securities for a given period.
Understanding Debt Instruments
Basis points are more important when discussing debt instruments, such as bond yields and loan interest rates, as they can change in small segments. Bonds and loans come with stated interest rates that can easily change by 10, 20 or 50 basis points, also affecting their true yield (bonds) or cost (loans). Stock prices can change by the minute. Bond and loan interest rates may change less frequently. Every change affects their yield percentage.
Exploring Stock Prices
Stock prices in the U.S. are quoted in dollars, with two decimal places, representing cents. Basis points do not relate to U.S. dollars. It's often easier and clearer to simply state stocks' price changes. Increases or decreases in stock prices, expressed as basis points, can still be meaningful for investors to learn how individual stock prices are trending as percentage changes. Tracking basis point changes over time may influence your buy or sell decisions.
Converting Basis Points
The formula for converting basis points to more traditional percentages is quite simple. Multiply the number of basis points by 0.0001. For example, if a stock you're following has a price increase of 225 basis points and you want to know the percentage of change, just multiply the 225 basis points by 0.0001 to get the result -- 0.0225, which translates to 2.25 percent.
Computing Stock Basis Points
When you want to know the number of basis points a stock price increases or decreases, the formula is equally simple. Use day "X" as its starting price, and day "Y" as its current price. Divide the current price, say $11, by the starting price, say $10. The result is 1.1. Subtract one from the result, leaving .1, as the change in value stated as a percent. Then multiple this percentage by 100. You'll learn that this stock has increased by 10 basis points [.1 times 100].
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