Key takeaways
- A CFD is a contract with a broker mirroring a price; you do not own the asset.
- Financing is charged on the full position every night and can exceed the margin over long periods.
- Dividends are adjusted in cash, not paid; corporate actions follow the broker's terms.
- Regulators limit leverage, require negative balance protection and risk warnings, and in some places ban CFDs for retail clients.
- CFDs suit short-term trading and hedging; compare real assets for long-term exposure.
- Always read the contract specification and size from the loss you accept.
A contract for difference, or CFD, is an agreement with a broker to exchange the difference between a price at the start and at the end of a trade. You never own the share, index, commodity or currency: you hold a contract that mirrors its price. That makes CFDs flexible, cheap to enter and easy to go short, and also leveraged, complex and, for most retail clients, loss-making. This guide explains how CFDs are priced and costed, how they differ from owning the asset, what regulators have restricted and how to decide whether a CFD is the right instrument for a particular goal.
How a CFD works
You choose a market, such as a share index, a company share, gold or a currency pair, and a direction. If you buy, you profit when the price rises; if you sell, you profit when it falls. When you close, the broker pays or charges you the difference between the closing and opening prices times the contract size. You post margin, a fraction of the position value, which gives the trade its leverage. Because you are trading with the broker, the broker sets the quotes, the margin requirements and the financing terms, which is why the broker's regulation and execution policy matter.
| Feature | CFD | Owning the share or ETF |
|---|---|---|
| What you hold | A contract with the broker | The asset itself, held in custody for you |
| Direction | Long or short with equal ease | Long easily; short needs borrowing or a different product |
| Leverage | Built in through margin | None unless you borrow on margin |
| Cost to hold | Daily financing on the full position | No financing; custody or account fees may apply |
| Dividends | Cash adjustment: credit for long, charge for short | Paid as dividends, with withholding tax |
| Voting rights | None | Yes, for shares |
| Typical horizon | Short to medium | Medium to long |
| Risk to capital | Can lose more quickly; limited by negative balance protection where it applies | Loss limited to the amount invested |
Where the costs are
CFD costs are mostly built into the price rather than shown as a line item. The spread is the first: you buy at the ask and sell at the bid. Some share CFDs add a commission as a percentage of the position with a minimum charge. Financing is the second large cost: holding a long position overnight typically costs a benchmark interest rate plus a markup, charged on the full value, while a short position may earn a smaller rate after the broker's markup. Currency conversion applies when the instrument or your profit is denominated in another currency. Guaranteed stops, where offered, add a fee or a wider spread.
Worked example: a share index CFD held for three weeks
You buy an index CFD with a notional value of 20,000 at an index level of 5,000, using 5 percent margin of 1,000. The spread is 1 index point, worth 4 units of currency on this contract, so entry costs about 4. Suppose financing is an annual benchmark rate of 4 percent plus a 2.5 percent markup, 6.5 percent in total, charged on the full 20,000. That is about 3.56 per day, or roughly 75 for 21 days. If the index rises 2 percent, your gross gain is 400; after the spread and about 75 of financing the net is about 321. If the index instead falls 2 percent, you lose 400 plus the same costs, 479, nearly half of your margin from a two percent index move.
| Item | Value |
|---|---|
| Notional value | 20,000 |
| Margin (5%) | 1,000 |
| Spread cost | about 4 |
| Financing (6.5% a year on 20,000 for 21 days) | about 75 |
| Gross result if index +2% | +400 |
| Net result if index +2% | about +321 |
| Net result if index -2% | about -479 (48% of margin) |
Financing at 6.5 percent a year on a 20,000 position, plus a 4 unit spread. A simple illustration of how holding costs grow with time.
Dividends, corporate actions and indices
A share CFD does not receive the dividend. Instead, on the ex-dividend date the broker credits a long position with an amount equivalent to the dividend, often after tax, and charges a short position the same. An index CFD is adjusted for the dividends of its constituents in a similar way. Corporate actions such as splits, mergers and rights issues are applied by the broker according to its terms, which can differ from the outcome for a shareholder. Read the terms for your instrument; they are listed in the contract specifications.
What regulators have done about CFDs
Because CFDs are leveraged and complex, regulators have acted. The UK, the European Union and Australia limit leverage for retail clients, require negative balance protection and margin close-out and mandate a standardised risk warning that discloses the share of retail accounts losing money with the provider. Some jurisdictions restrict marketing, including bonuses and incentives, and restrict or ban certain products such as crypto-asset CFDs for retail clients. In the United States, retail clients cannot trade CFDs. The rules change, so confirm what applies to the entity that serves you.
| Protection | What it does |
|---|---|
| Leverage limits | Caps position size relative to margin by instrument type |
| Margin close-out | Positions closed when margin falls to a set level |
| Negative balance protection | Prevents losses beyond the account balance for retail clients |
| Standardised risk warning | Shows the share of retail accounts that lose money with the provider |
| Marketing restrictions | Limits bonuses, incentives and misleading promotions |
| Product restrictions | Bans or limits some underlying products for retail clients |
CFDs versus futures, options and real assets
| Instrument | Best for | Main trade-off |
|---|---|---|
| CFD | Short-term trading, hedging, access to many markets from one account | Financing on the full position; counterparty is the broker; leverage risk |
| Futures | Standardised exposure on an exchange, often lower holding costs for large positions | Contract sizes, expiry and rollover; larger minimum positions |
| Options | Defined-risk views and hedging | Complexity, time decay and pricing skill |
| Shares and ETFs | Long-term investing | No leverage unless borrowed; trading costs and custody |
Is a CFD the right tool? A short checklist
- Is your horizon days or weeks rather than years? If years, compare real assets or funds.
- Can you explain the financing rate and markup for your instrument in writing?
- Do you know your broker's margin call and stop-out levels and its policy on gaps?
- Is negative balance protection confirmed for your entity?
- Have you sized the position from the loss you accept, not from available margin?
- Do you understand that the broker may be the counterparty to your trade and how conflicts are managed?
Before your first CFD trade
- Read the contract specification. It lists contract size, margin, financing, dividend treatment, trading hours and any maximum position.
- Compute the cost of holding for the planned time. Spread plus financing plus expected conversion.Tip: If the cost is a large share of your target, reconsider.
- Set the stop before the entry. The stop distance decides the position size.
- Check events during the holding period. Earnings, dividends and central-bank dates can move prices and spreads.
- Place the trade small and review the statement. Confirm the costs charged match your calculation.
Frequently asked questions
Can I lose more than I deposit on a CFD?
Where negative balance protection applies, no. Where it does not, a gap can leave a negative balance. Check your agreement.
Are CFDs legal everywhere?
No. Rules vary: some countries restrict leverage or products, and US retail clients cannot trade CFDs.
Do I own the shares if I buy a share CFD?
No. You hold a contract and have no shareholder rights. Dividends are handled by a cash adjustment.
What is overnight financing on a CFD?
A daily charge or credit on the full position for holding it past the cut-off, based on a benchmark rate plus the broker's markup.
Why are CFDs considered risky?
Leverage magnifies losses, costs accumulate with time, and the broker is the counterparty. Regulators require risk warnings because most retail accounts lose money.
Are CFDs good for long-term investing?
Usually not, because financing accrues daily on the full position. Real assets or funds are generally better suited to long holds.
What is a guaranteed stop?
A stop that fills at your level even in a gap, offered by some brokers for a fee or a wider spread.
How do I choose a CFD broker?
Verify the regulation of your entity, compare costs including financing on your instruments, test the platform and read the execution policy and contract specifications.