What CFD (contract for difference) means
A contract for difference, or CFD, is an agreement between you and a broker to exchange the difference in an asset's price between the time a contract is opened and the time it is closed. You never own the underlying asset. You do not hold a share, a barrel of oil or a coin. You hold a contract whose value follows its price.
CFDs exist on many markets: shares, stock indices, currencies, commodities, bonds and crypto assets. They are popular with active retail traders because they allow both long and short positions, use leverage, and can be opened with relatively small amounts of capital.
Because they are leveraged derivatives, CFDs carry a high risk of rapid loss. Regulators in many jurisdictions require brokers to show the percentage of retail client accounts that lose money on them, and some countries restrict or ban them for retail clients.
How it works
When you open a CFD, the broker records the price and the size of the position. As the market moves, your profit or loss changes. When you close, the difference is settled in cash in your account currency.
- Choose the instrument and direction. Buying (long) profits if the price rises. Selling (short) profits if it falls.
- Choose the size. This is usually in contracts or units, each linked to a number of units of the underlying.
- Post margin. You only deposit a fraction of the full position value, set by the leverage available. Margin = position value / leverage.
- Pay costs. These include the spread, possible commission, overnight financing for positions held past the daily cut-off, and in some markets a currency conversion fee.
- Close the position. Profit or loss = (closing price - opening price) x size for a long, and the reverse for a short.
If the loss grows and your equity falls too low relative to the margin used, the broker issues a margin call or automatically closes positions at the stop-out level.
A worked example
These numbers are illustrative only. Suppose a share trades at 50.00 and you buy 200 share CFDs, with leverage of 5:1 (20 percent margin).
- Position value: 200 x 50.00 = 10,000.
- Margin required: 10,000 / 5 = 2,000.
- Spread cost: if the buying price is 50.05 and the sell price 49.95, the round trip costs about 200 x 0.10 = 20.
- Scenario A: you close at 53.00. Gain = (53.00 - 50.05) x 200 = about 590 using the actual entry price, minus any financing.
- Scenario B: you close at 46.00. Loss = (46.00 - 50.05) x 200 = about -810.
On a 2,000 margin deposit, a 810 loss is more than 40 percent of the funds committed, from a share move of under 8 percent. The same leverage that magnifies the gain magnifies the loss.
Why it matters
CFDs let people trade price moves without buying the asset, so they can react to news quickly and go short as easily as long. Costs and risks are, however, quite different from investing in the underlying share or fund. You usually receive no voting rights, and any dividend is handled through an adjustment payment instead of a normal dividend.
Costs build up over time. Holding a leveraged long position for weeks means paying financing every night, and the total can exceed the profit. This makes CFDs better suited to short-term trading than to buy-and-hold investing.
How the broker handles the other side of the trade also matters. Some act as the counterparty to the client, while others route orders to external liquidity providers. This is described in the broker's execution model and conflicts of interest policy.
How to use it in practice
- Read the risk warning and the percentage of retail accounts that lose money, which licensed brokers publish.
- Check the margin requirement for each instrument, as it differs between forex, indices, shares and crypto.
- Review the full cost list: spread, commission, overnight financing, inactivity fee, conversion fee.
- Test on a demo account first.
- Use a stop-loss and size positions so a single loss stays small relative to your account.
- Confirm negative balance protection and how the stop-out level works.
Common mistakes and misconceptions
- Thinking you own the asset. You hold a contract, with no shareholder rights.
- Looking only at the spread. Overnight financing can be the larger cost on longer holds.
- Using maximum leverage because it is available. Higher leverage means smaller price moves can end the trade.
- Ignoring gaps. Prices can jump past a stop-loss between sessions, and the close-out price may be worse than expected.
- Assuming CFDs are available everywhere. They are restricted or banned for retail clients in some countries.
Risks and limitations
The main risk is rapid loss because of leverage. In some regions retail clients are protected by negative balance protection, meaning they cannot lose more than the account balance, but this is not universal. Counterparty risk exists too: you depend on the broker's solvency, which is why segregation of client money and regulation matter.
CFD tax treatment varies by country, and rules on leverage, marketing and product availability change over time. This page is educational and not advice to trade.
How Brokeli looks at it
In our research we separate CFD costs into spreads, commissions, financing and ancillary fees, and we record leverage limits and negative balance protection by regulatory entity. Availability for retail clients differs by country, so the published research snapshot notes where CFDs are offered and under which licence.
Frequently asked questions
What is a CFD in simple terms?
A contract with a broker that pays you, or charges you, the change in an asset's price between opening and closing. You gain or lose from the price movement without owning the asset itself, and you can usually profit from falling prices as well as rising ones.
Can you lose more than you deposit with CFDs?
It depends on the jurisdiction and account type. Retail clients in some regions have negative balance protection, which limits losses to the account balance. Professional accounts or offshore entities often do not offer it. Always check the broker's terms before trading.
What is the difference between trading CFDs and buying shares?
Buying shares gives you ownership, voting rights and dividends, with losses limited to the amount invested. CFDs give exposure to price only, use leverage, charge overnight financing and can lose money much faster. CFDs are generally used for short-term positions.
Why are CFDs banned or restricted in some countries?
Regulators have judged that leveraged products carry too high a risk for most retail clients. Some limit leverage, require risk warnings, or prohibit sales to retail investors. The rules differ by country and change over time.
What fees do CFDs have?
Typical costs are the spread, sometimes a commission on shares, overnight financing on leveraged positions held past the cut-off, and possibly currency conversion or inactivity fees. The full list should appear on the broker's fee schedule.