Points and pills

Q: Can you explain what “points” are, financially speaking? — T.P., Biloxi, Mississippi

A: There are several kinds of points:

In the mortgage world, points are fees you can choose to pay to your lender for a lower interest rate. A point is 1% of your loan amount — so, for a $200,000 mortgage, a point is $2,000.

A “basis point,” meanwhile, is one one-hundredth of a percentage point, or 0.01%. People sometimes refer to basis points when talking about interest rates or bond yields.

Stock market indexes are often measured in points rather than dollars, even though they’re based on stocks that trade in dollars. For example, the Dow Jones Industrial Average or the S&P 500 might go up (or down) hundreds of points in a day.

Q: I read that Netflix once used a “poison pill” strategy — what’s that? — P.B., Greensburg, Pennsylvania

A:

In 2012, corporate raider Carl Icahn alarmed Netflix when he bought almost 10% of the company’s stock — suggesting that he might have been preparing to push for a leadership change or even a hostile takeover. So Netflix did what many companies have done to avoid being taken over — it instituted a “shareholder rights plan,” otherwise known as a poison pill. One variety, when triggered, permits the company to sell shareholders newly issued shares, in order to dilute the potential acquirer’s stake.

Poison pill plans are typically triggered whenever some party’s ownership stake in a company crosses a certain threshold. These plans can successfully fend off takeovers. But they have risks of their own: Sometimes a takeover isn’t a bad thing, and diluting shares can hurt existing shareholders.