A contract for difference (CFD) is an agreement with a provider to exchange the difference in the price of an asset between the moment a position is opened and the moment it is closed. You never own the share, currency or commodity itself; you hold a contract whose value follows it.
Margin and leverage
CFDs are traded on margin: you put up only a fraction of the position's full value. With leverage of 1:30, a position worth 3,000 euros needs about 100 euros of margin. Leverage does not change the size of the price move - it changes how large that move is compared with the money you put down.
A 2% price move against you, as a share of the margin put up
Margin calls and stop-outs
When losses eat into the margin, the provider may ask for more funds (a margin call) or close positions automatically (a stop-out). In fast markets this can happen within minutes, and the closing price may be worse than the level you expected.
The costs you pay
- Spread - the gap between buy and sell price.
- Commission - charged by some providers on shares and indices.
- Overnight financing - a daily charge (or occasionally credit) for holding a leveraged position past the end of the trading day.
- Currency conversion - when the instrument is priced in a different currency from your account.
How regulators treat CFDs
Because losses are frequent, many regulators restrict how CFDs are sold to retail clients. In the European Union and the United Kingdom, for example, leverage for retail clients is capped (at 1:30 on major currency pairs and lower on other assets), negative-balance protection is required, bonuses to attract clients are banned, and providers must display the percentage of their retail accounts that lose money. Those published figures are typically well above half.
Red flag. Anyone offering retail clients leverage far above these caps, "guaranteed" profits, or a personal account manager who pushes you to add funds is very likely operating outside regulation.
Questions to ask before using any CFD provider
- Is the firm listed on my national regulator's public register, under the exact name and website address it uses?
- What percentage of its retail accounts lose money, according to its own risk warning?
- What are the full costs, including overnight financing, for the way I intend to trade?
- Do I understand how much I could lose on a bad day, in money rather than percentages?
This guide is general education, not personal advice. Rules differ by country; check your regulator's website for the requirements that apply to you.