In today’s financial world being financially savvy just makes good sense. Sure, you can hire the pros to look after your investments. But unless you just want to hand over the keys to your kingdom and trust them to always work in your best interests; you need to know what they are talking about when they tell you what they are doing or what they recommend that you do.
Knowing what financial jargon they use can only help you better understand what is happening to your nest egg.
Everyone understands the concept of interest. Funds are either borrowed or lent at an agreed upon interest rate which will be paid in addition to the return of the funds over an agreed upon length of time. Simply put: if you borrow $100 for one year at 10%, you will owe $110 at the end of that year.
When one invests in financial assets, however, nothing is that simple. There are multiple streams of payments, odd amounts, public markets and a host of other things to complicate something as simple as interest.
Financial folk have come up with the term “basis points” to help better define interest rates to be paid and interest yield to be received. In many cases, the term also defines fee income to the financial advisors.
Simply put: one basis point is the same as 1/100 of 1%. 100 basis points equals 1%. 200 basis points equal 2%. 50 basis points equal 1/2%.
It is important to understand the term. It will be used to define your interest income as well as fees you may pay your financial advisors. In finance, like most things, knowledge is power.