CFD (contract for difference)

A contract for difference is a cash-settled agreement between you and a broker. You choose an instrument (a currency pair, an index, gold, a share), a direction and a size. When you close, the price difference multiplied by the size is credited to or debited from your account. No currency, shares or metal change hands.

Most retail forex trading in the EU and UK is done through CFDs or the closely related rolling spot contracts.

Key features

• Long or short: you can sell as easily as you buy.
• Margin: you put up a fraction of the position's value. Under ESMA rules retail leverage is capped at 30:1 on major currency pairs, down to 2:1 on crypto.
• Costs: the spread, any commission, overnight swap and possibly currency conversion.
• Counterparty: the broker, not an exchange. That is why the broker's regulation and execution model matter.

Worked example

You buy a EUR/USD CFD of one standard lot (100,000 euros) at 1.0800. At 30:1, the margin is about 3,600 dollars. If price rises to 1.0850, the gain is 50 pips times 10 dollars, or 500 dollars before costs. If it falls 50 pips, you lose 500 dollars: nearly 14% of the margin from a move of under half a percent.

The risk

Every EU and UK CFD provider must publish the share of its retail accounts that lose money, and the figures are consistently high. See CFD loss disclosure, what is a CFD and why most retail CFD traders lose.