A basis point can be defined as the unit of measuring which is used in finance related matters to tell about the percentage change in value of that particular financial instrument. Generally, basis point is used to show changes in the interest rates and bond yields.
Basis point is used to calculate equity indexes also. They are generally used to tell the changes which occur in equity indexes and also help in calculating the fluctuations that are seen in interest rates. Basis point is used so that there are no chances of doubt left, as this basis point brings accuracy with it. Values that are given by the basis point are accurate and exact. This shows that basis point holds an important place in stock markets as they will give the exact figure of fluctuations that occur in stock market and those figures can be understood easily by others if the figures are shown with the help of base points. Basis point removes the error which can occur due to changes in percentages as the figures are accurate.
Investors get affected at a very high scale if there are changes in the interest rates. Changes in interest rates can lead an investor to have high profits or huge losses. So, investors need to be conscious about the changes occurring in base points in order to know the right position of their investment. All the changes which occur in percentage terms in stock markets are expressed as basis points. Sometimes financers try to confuse the general public by using the term basis point as this jargon is not common amongst public. The financers tell the interest rates in terms of basis point to consumers in order to cheat them due to which investors come in their trap and get cheated very easily through them. So, general investors should be aware and familiar with the term of basis point.
Basis point is the simplest way to depict changes in interest rates and know that what changes are brought in stock market due to change in interest rates. No separate calculation is needed after calculating interest rate in terms of base points. Though the relationship between stock market and interest rates is indirect yet an investor needs to be careful regarding his investment because stock market and interest rates moves in two directions. When the interest rate becomes high stock markets come down and economy becomes sluggish because people start investing their money in banks in order to get good returns on their investment which is safe also. People prefer to invest in banks rather than stock markets because stock markets are uncertain and the return on investment is also uncertain.
Government keeps on altering the interest rates in order to affect the investments and to keep the money flowing in the business cycle for the growth of our developing economy. When the interest rates fall, investor is no longer allured and interested in investment in fixed deposits as the return on investment is very low and investors start moving towards the market in order to gain high profits on their investment. When the interest rates fall people are attracted to buy more shares in stock market. Government sometimes raises the interest rates in order to stop those investors in stock market who are investing from wrong motive. Government also raises the interest rates in order to keep check on the rising inflation and withdraw money from the hands of common public. Though interest rates affect the markets but they don’t help in determine the markets. Investors should keep in mind that interest is not the only factor which decides the fate of stock market rather it is just one of the factors which decide the fate of stock market.
In order to conclude this topic, we can say that interest rates play an important move in stock market movements but it won’t be right to say that if the market has gone done it’s just because of increased interest rates because there will be several other factors which will be responsible for the downward movement of stock prices.