In short
- A CFD is an agreement to exchange the difference in an asset's price between opening and closing the contract.
- You can go long or short, usually with leverage, and pay spreads and overnight financing.
- In the UK and EU, retail CFD clients get leverage caps, margin close-out and negative balance protection.
- Providers must disclose what share of their retail clients lose money; it is usually most of them.
How a CFD works
With a contract for difference, you and a provider agree to exchange the change in an asset's price. If you buy (go long) and the price rises, the provider pays you the difference; if it falls, you pay the provider. If you sell (go short), the reverse applies. You never own the underlying shares, currency or gold.
Reverse the sign for a short position, then subtract costs
Example: you buy a CFD on 10 units of a stock index at 5,000 and close at 5,060. Profit = 60 × 10 = 600 in the index's currency, before spreads and financing.
Leverage and margin
CFDs are traded on margin: you deposit a fraction of the position's value. That is what makes small moves matter so much. A 2% fall on a position leveraged 20 times costs 40% of the margin behind it. Use the margin calculator to see what a position ties up.
Costs
- Spread: paid on opening every trade.
- Commission: charged on some accounts and on most share CFDs.
- Overnight financing: charged each night a position stays open, based on the full position value, not just your margin.
- Currency conversion: if the CFD is priced in a different currency from your account.
Because financing accrues daily, CFDs are generally expensive for holding positions over months. See trading fees explained.
Retail protections
Since 2018, rules introduced by the European Securities and Markets Authority and adopted by national regulators, including the UK's FCA, require providers serving retail clients to:
- cap leverage at between 30:1 and 2:1 depending on the asset;
- close positions when account equity falls to 50% of required margin;
- provide negative balance protection, so clients cannot lose more than their account balance;
- not offer bonuses or incentives to trade;
- show a standard risk warning including the percentage of their retail accounts that lose money.
Australia introduced similar rules in 2021. CFDs cannot be offered to retail clients in the United States.
Counterparty risk
A CFD is a contract with the provider, not a share on an exchange. If the provider fails, your money depends on how client funds were protected. That is why using a properly authorised firm matters; see how to check a broker.
Advantages and drawbacks
| Advantages | Drawbacks |
|---|---|
| Access to many markets from one account | Leverage magnifies losses |
| Can profit from falling as well as rising prices | Overnight financing makes long holds costly |
| Small position sizes available | Provider is your counterparty |
| Useful for short-term hedging | Most retail clients lose money |
Forex CFD or spot forex?
Many brokers offer forex and CFD trading side by side. For retail clients, a forex CFD and a "spot" forex position usually behave the same way: you hold a contract with the broker, not the currency itself. Online CFD trading on indices, gold and shares works on the same principle, with different leverage limits for each asset.
Frequently asked questions
Is CFD trading the same as owning shares?
No. With a CFD you only have a contract on the price. You do not own the shares, cannot vote, and your position depends on the provider rather than an exchange.
Why do most CFD traders lose money?
Leverage, trading costs and frequent short-term trading combine against retail traders. UK and EU providers must publish their percentage of losing retail accounts, and it is usually well over half.
Are CFDs legal in the US?
CFDs cannot be offered to retail clients in the United States.
Sources
- ESMA: CFD product intervention measures
- FCA: contracts for difference