What is a CFD? How contracts for difference work, what they cost and the risks

A CFD, or contract for difference, is an agreement between you and a broker to exchange the difference in the price of an asset between the moment you open a position and the moment you close it. You never own the asset itself; you simply gain if the price moves your way and lose if it moves against you, on the full size of the position. CFDs are traded on margin, which means a small deposit controls a much larger exposure, and that is why they carry a high risk of rapid losses.

In the EU, the UK and many other regions, CFDs are the main way retail traders access forex, stock indices, commodities and individual shares. This guide explains how they work, what they cost, how they compare with other ways of trading, and the risks that every new trader should understand before opening an account.

How a CFD works

When you buy a CFD you are not buying the asset. You are entering a contract whose value tracks the asset's price. Here is the basic mechanism:

1. You choose an instrument, for example EUR/USD, a stock index, gold or a share.
2. You decide on a direction: buy (go long) if you expect the price to rise, or sell (go short) if you expect it to fall.
3. You choose a size, measured in lots, contracts or units depending on the instrument.
4. The broker sets aside margin from your account, a fraction of the position's full value.
5. While the position is open, its gain or loss is calculated on the full position size and shown in your account in real time.
6. When you close, the difference between opening and closing price, multiplied by the size, is credited to or debited from your account, along with any charges.

That is all a CFD is: a cash-settled agreement. No shares are registered in your name, no physical gold is stored for you, and no euros are delivered to your bank account.

Who is on the other side?

Your counterparty is your broker. That makes CFDs different from exchange-traded products, where you trade with other market participants through a central exchange and clearing house. With a CFD:

• the broker quotes the price, usually based on the underlying market;
• the broker either takes the other side of your trade itself or hedges it with other parties, or a mix of the two;
• your position exists only on the broker's books.

This is why the choice of broker matters so much. You are relying on it to price fairly, execute properly and hold your money safely. Our guides to how forex brokers make money, ECN, STP and market maker execution and how to check a broker licence explain what to look for.

Going long and going short

A big feature of CFDs is that selling is as easy as buying. You do not need to borrow an asset to sell it short; you simply open a sell position.

Worked example: a long index CFD

Here is an illustrative example. A stock index is trading at 18,000 and you buy 2 CFDs worth 1 euro per index point each. Your exposure is 2 times 18,000 times 1 euro, or 36,000 euros.

• Under ESMA rules, retail leverage on major indices is capped at 20:1, so the minimum margin is 5%, or 1,800 euros.
• The index rises to 18,150, a gain of 150 points. Your gain is 150 times 2 euros, or 300 euros, before costs.
• If it falls 150 points instead, the loss is 300 euros.

A 150-point move is less than 1% of the index level, but it is about 17% of the margin. That ratio is the essence of leverage. Our guide to leverage and margin covers how margin is calculated.

Worked example: a short forex CFD

You sell 1 mini lot (10,000 units) of GBP/USD at 1.2700, expecting the pound to fall against the dollar.

• Your exposure is 12,700 dollars. At 30:1 leverage, the maximum for major currency pairs for retail clients under ESMA rules, the margin required is about 423 dollars.
• If GBP/USD falls to 1.2650, you buy it back 50 pips lower. On a mini lot a pip is worth 1 dollar, so you gain 50 dollars, less costs.
• If it rises to 1.2750, you lose 50 dollars.

For an explanation of pips and lot sizes, see what is a pip and lot sizes and position sizing.

What CFDs cost

CFDs have several costs, and they add up differently depending on how often you trade and how long you hold.

The spread

The difference between the buy and sell price. You pay it in full on every round trip. On major forex pairs it can be a fraction of a pip; on less liquid instruments it can be much wider. See reading a forex quote.

Commission

Some accounts and instruments charge a commission per trade instead of, or as well as, a wider spread. Share CFDs commonly carry a commission based on the trade's value; forex raw-spread accounts charge a fixed amount per lot. Our guide to spreads and commissions shows how to compare the two models.

Overnight financing (swap)

Because a CFD is a leveraged position, holding it past the daily cut-off incurs a financing adjustment. For most CFDs, long positions pay a charge based on a benchmark interest rate plus the broker's markup, and short positions may receive or pay depending on rates. For forex, the swap reflects the interest-rate difference between the two currencies. Over weeks and months, financing can be the largest cost of all. See swap and overnight financing.

Currency conversion

If the instrument is priced in a currency different from your account, gains, losses and charges are converted, often with a fee or markup on the rate. Our guide to hidden broker fees covers this and other charges such as inactivity fees.

Other charges

Some brokers charge for market data on certain share CFDs, for stops that are protected against slippage, or for withdrawals. These are usually disclosed in the costs and charges documents that EU and UK brokers must provide.

Worked example: the cost of holding a position

An illustrative example: you buy a share CFD with an exposure of 10,000 euros and hold it for 30 days. Suppose the broker charges a 0.1% commission each way and an annual financing rate of 6% (a benchmark rate plus markup) on the full exposure.

• Commission: 10 euros to open and roughly 10 euros to close, about 20 euros.
• Financing: 10,000 euros times 6%, divided by 365, times 30 days, is about 49 euros.
• Total: about 69 euros, or nearly 0.7% of the exposure, before the spread and before the share has moved at all.

For a short-term trade, financing is small. For a position held for months, it can turn a small gain into a loss. Always check the financing rate before planning a long hold.

CFDs compared with other ways to trade

CFDs vs buying the asset

If you buy shares through a stockbroker, you own them, can usually hold them indefinitely without financing costs, may receive dividends and voting rights, and cannot lose more than you paid. With a share CFD you can use leverage and go short, but you own nothing, you pay financing for as long as you hold, and dividends are handled as cash adjustments rather than paid to you as a shareholder.

CFDs vs spot forex

In retail forex, the line between a CFD and a "rolling spot" contract is mostly legal. Both are cash-settled, leveraged, rolled over daily with a swap, and traded with a broker. Regulators in the EU and UK treat rolling spot forex for retail clients under the same restrictions as CFDs.

CFDs vs futures

Futures are standardised contracts traded on an exchange, such as CME or Eurex. They have fixed contract sizes, expiry dates, central clearing and transparent volume. Financing is built into the futures price rather than charged daily, and you trade against other market participants. CFDs are more flexible in size and usually have no expiry, but they are an over-the-counter contract with your broker. Some brokers also offer CFDs whose prices are based on futures, which do expire or roll.

CFDs vs spread betting

In the UK and Ireland, spread betting is offered alongside CFDs. Economically it is very similar: leveraged, cash-settled exposure to a price. The difference is in the structure, which is expressed as a stake per point, and in tax treatment, which depends on your personal circumstances and where you live.

Where CFDs are allowed

CFDs are widely offered to retail clients in the EU, the UK, Australia and many other jurisdictions, each with its own rules. They are not available to retail traders in the United States, where retail forex is instead traded with registered dealers under separate rules, and other derivatives are traded on exchanges. Some other countries also ban or restrict them. If a firm offers you CFDs despite rules in your country, treat that as a warning sign; see our guide to forex scam red flags.

How CFDs are regulated in the EU and UK

In 2018 the European Securities and Markets Authority (ESMA) introduced product intervention measures for CFDs sold to retail clients, later made permanent by national regulators. The UK's FCA adopted equivalent rules. The main points:

• Leverage caps: 30:1 on major currency pairs; 20:1 on non-major currency pairs, gold and major stock indices; 10:1 on other commodities and minor indices; 5:1 on individual shares; 2:1 on cryptocurrencies.
• Margin close-out: the broker must close positions when your account equity falls to 50% of the margin required for your open positions.
• Negative balance protection: retail clients cannot lose more than the money in their CFD account.
• No inducements: brokers cannot offer monetary or non-monetary incentives to trade.
• Risk warning: brokers must display a standardised warning including the percentage of their retail CFD accounts that lose money.

In the UK, the FCA has also banned the sale of cryptocurrency CFDs to retail clients. Clients who meet certain criteria can apply to be treated as professional clients and lose these protections in exchange for higher leverage. Our guide to ESMA leverage limits and negative balance protection covers the rules in full, including professional status.

The risks, in plain language

Leverage magnifies losses

The defining risk. A price move of 1% on a position leveraged 30:1 is a 30% change in the margin committed. Losing positions can wipe out the margin quickly, and the 50% close-out rule means your broker may close positions for you at a loss.

Most retail accounts lose money

This is not a guess: EU and UK brokers must publish the percentage of their retail CFD accounts that lose money. Published figures commonly fall somewhere between about 60% and 90%. When ESMA reviewed the market before its 2018 measures, it found that 74–89% of retail accounts typically lost money. Our guide to why most retail CFD traders lose looks at the reasons.

Gaps and slippage

Prices can jump past your stop-loss over a weekend, on news or in thin markets, and orders are filled at the next available price. See slippage explained and margin call and stop-out.

Counterparty and broker risk

Your contract is with the broker. If the broker is poorly regulated or fails, getting your money back can be difficult. Choose a firm authorised by a credible regulator, check that client money is segregated, and find out whether an investor compensation scheme applies. Our regulator registers page lists where to check.

Costs over time

Financing charges accumulate daily. Strategies that look acceptable on paper can lose money once realistic spreads, commissions and financing are included.

Common mistakes with CFDs

• Sizing on margin rather than exposure. A 400-dollar margin can control a 12,000-dollar position. Size positions on the risk to your account if your stop is hit, as explained in our position sizing guide.
• Ignoring financing. Holding leveraged positions for months without checking the swap can quietly erode a winning trade.
• Assuming stops always fill at the stop price. Standard stops become market orders and can slip in a gap.
• Using maximum leverage because it is available. The cap is a ceiling, not a recommendation.
• Trading without a plan. Decide the entry, exit, stop and size before you place the order, and record it in a trading journal.

Our glossary defines the terms in this guide, and our risk warning sets out the risks of leveraged trading.

Frequently asked questions

Do you own anything when you buy a CFD?

No. A CFD is a contract with your broker that pays or charges the difference in price between when you open and close. You do not own the underlying share, currency or commodity, and for share CFDs you do not get voting rights.

Can you lose more than you deposit with CFDs?

In the EU and the UK, retail clients have negative balance protection, so losses are limited to the money in the CFD account. Outside those regions, and for clients classified as professional, that protection may not apply. Check your broker's terms.

Are CFDs legal in the UK and EU?

Yes, for retail clients, subject to the leverage caps, margin close-out, negative balance protection and risk warning rules introduced by ESMA in 2018 and adopted by the FCA in the UK. They are not available to retail clients in the United States.

Why do most people lose money trading CFDs?

The combination of leverage, trading costs and common behavioural mistakes such as overtrading, using too much size and not cutting losses. Broker disclosures in the EU and UK consistently show that a majority of retail accounts lose money.

How is a CFD different from a futures contract?

A futures contract is standardised and traded on an exchange with central clearing and a fixed expiry date. A CFD is an over-the-counter contract with your broker, usually with flexible sizes and no fixed expiry, and holding it overnight incurs a daily financing charge.

Do CFDs pay dividends?

You do not receive dividends as a shareholder. Instead, brokers make a cash adjustment on share and index CFDs when an underlying share goes ex-dividend: long positions usually receive an adjustment and short positions are usually charged one.