Published on: 2025-09-10
Updated on: 2026-07-17
A contract for difference, or CFD, is an agreement between you and a broker to exchange the difference in the price of an asset between the moment you open the trade and the moment you close it. You never own the asset itself. You trade on its price movement. If the price moves the way you predicted, the broker pays you the difference. If it moves against you, you pay the difference.
CFDs sit inside the wider over-the-counter derivatives market. This guide explains the mechanics step by step, using worked numbers, and points to the official rules that govern the product.
CFD stands for “contract for difference.” You trade the price change of an asset without owning it.
You can go long or short. A long position profits when the price rises. A short position profits when the price falls.
CFDs are leveraged. You deposit a margin, a small percentage of the full position value, so gains and losses are magnified relative to your deposit.
Retail leverage is capped by regulators in the UK, EU, and Australia, ranging from 30:1 on major currency pairs down to 2:1 on cryptocurrencies.
Most retail CFD accounts lose money. UK and EU regulators report loss rates of 74 to 89 per cent, so understanding the costs and risks matters before you trade.
A CFD is a leveraged derivative. “Derivative” means its value comes from an underlying asset rather than from the contract itself. The UK’s Financial Conduct Authority describes CFDs as “complex, leveraged derivatives” typically offered to retail clients through online platforms. Australia’s regulator, ASIC, defines a CFD as , such as an exchange rate, a stock index, a single share, a commodity, or a crypto-asset.
The defining feature is that you do not take ownership. If you buy a share CFD on a company, you do not receive the actual share, voting rights, or a share certificate. You hold a contract whose value tracks that share’s price. When you close the contract, you settle the difference in cash. This is what separates a CFD from buying the asset directly. For a broader view of how this fits with other instruments, see our overview of CFD trading.
Every CFD trade has two directions.
A long position, or a buy, profits if the price goes up. You open at a lower price and aim to close at a higher one.
A short position, or a sell, profits if the price goes down. You open at a higher price and aim to close at a lower one. Shorting is built into the product, so you can trade falling markets as easily as rising ones.
Your result on any CFD follows one formula:
Profit or loss = (closing price minus opening price) × position size
Here is a simple example. You expect gold to rise. You buy a CFD equal to 10 ounces of gold at a price of 2,400 US dollars per ounce. The price rises to 2,430. Your profit is (2,430 minus 2,400) × 10 = 300 US dollars. If gold had fallen to 2,370 instead, you would have lost (2,370 minus 2,400) × 10 = negative 300 US dollars. The size of your position, 10 ounces, turns each dollar of price movement into 10 dollars of profit or loss.
You do not pay the full value of a CFD position to open it. You deposit a smaller amount called margin. The margin is set as a percentage of the full position value, known as the notional value. Leverage is the inverse of that percentage.
If a broker asks for 5 per cent margin, your leverage is 20:1, because 5 per cent is one twentieth of the position. A 3.33 per cent margin means 30:1 leverage. Margin and leverage describe the same thing from two directions. You can read a fuller breakdown in our explainers on how margin works and what leverage means in trading.
Leverage is powerful, so regulators cap it for retail clients. The European Securities and Markets Authority set the following limits, which took effect on 1 August 2018. The UK’s FCA made the same limits permanent for UK retail clients as of 1 August 2019, and Australia’s ASIC applied comparable caps as of29 March 2021.
| Underlying Asset | Maximum Retail Leverage | Minimum Margin Requirement |
|---|---|---|
| Major currency pairs | 30:1 | 3.33% |
| Non-major currency pairs, gold, and major indices | 20:1 | 5% |
| Commodities (excluding gold) and minor indices | 10:1 | 10% |
| Individual shares and other assets | 5:1 | 20% |
| Cryptocurrencies | 2:1 | 50% |
Say you buy a CFD on 10,000 units of EUR/USD at 1.1000. The full position value is 11,000 US dollars. At the retail cap of 30:1, your required margin is 3.33 per cent, which is about 366 US dollars. That 366 dollars controls an 11,000-dollar position.
This is where leverage cuts both ways. A price move of just 1 per cent against you equals 110 US dollars, which is roughly 30 per cent of your margin. The same 1 per cent in your favour is a 30 per cent gain on the margin. Small market moves become large moves relative to the cash you put up.
To limit the damage, regulators require a margin close-out rule. Under ESMA and FCA rules, the broker must close your positions once your account equity falls to 50 per cent of the margin needed to keep them open. Suppose you funded the account with 400 US dollars and used 366 as margin. If losses push your equity down to about 183 dollars, half of the required margin, the broker starts closing the position automatically. You do not get to wait and hope.
Regulators also require negative balance protection for retail clients. This means you cannot lose more than the total funds in your CFD account, even if the market gaps far past your close-out level. The FCA rule guarantees that “a client cannot lose more than the total funds in their CFD account.”
The headline price is not the only cost. Four charges matter most.
Spread. This is the gap between the buy price and the sell price. You open slightly above the mid-price and close slightly below it, so the spread is a built-in cost on almost every trade. In liquid markets it is small. Our guide to understanding the spread explains how it is quoted.
Commission. Many brokers charge a separate commission on share CFDs, usually a percentage of the position value or a flat fee per trade. Forex and index CFDs are often commission-free, with the cost inside the spread.
Overnight financing, also called swap. Because you only deposit margin, the broker effectively finances the rest of the position. If you hold a position past the daily cut-off time, a financing charge or credit applies. It is calculated on the full position value, not on your margin, and follows a benchmark interest rate plus or minus the broker’s adjustment. A common structure is:
Daily financing = position value × (benchmark rate ± broker spread) ÷ 360
For currency CFDs, the charge reflects the interest rate difference between the two currencies. Because this cost accrues every day on the full value, CFDs are built for short-term positions and are poorly suited to holding for months or years.
Dividend adjustments on share CFDs. If you hold a share CFD over an ex-dividend date, a long position is credited an amount close to the dividend and a short position is debited. This mirrors what would happen to the share price, so the CFD stays fair.
Some brokers also charge a fee for a guaranteed stop-loss, which fills your exit at the exact level you set even if the market gaps.
The main risks connect directly to the mechanics above.
Leverage magnifies losses. The same feature that boosts gains works in reverse. A modest adverse move can erase a large part of your deposit, as the worked example showed.
Gapping and slippage. Prices can jump from one level to the next, especially around news or over the weekend. A stop-loss may fill at a worse price than you set, unless it is a guaranteed stop.
Automatic close-out. The 50 per cent margin rule can force your positions closed at a loss before you have a chance to add funds or wait for a recovery.
Counterparty risk. A CFD is a private contract with your broker, not an exchange-traded product. If the broker fails, you depend on client-money rules and local protections. This is one reason the choice of a regulated broker matters. See our guide to how to choose a broker and our explainer on broker execution models.
Cost drag over time. Daily financing steadily reduces returns on any position you keep open, which compounds against long-held trades.
CFDs are one way to gain price exposure. They differ from the main alternatives in clear ways.
| Feature | CFD | Owning the Asset | Futures | Options |
|---|---|---|---|---|
| Ownership | No ownership of the underlying asset | Owns the underlying asset | No ownership of the underlying asset | No ownership of the underlying asset |
| Where it trades | Over the counter (through a broker) | Stock exchange or other regulated market | Regulated futures exchange | Regulated options exchange |
| Expiry date | Usually none | None | Fixed expiry date | Fixed expiry date |
| Leverage | Yes, subject to retail limits where applicable | Usually none | Yes | Available, depending on the strategy |
| Going short | Direct and straightforward | Usually requires margin borrowing | Direct and straightforward | Possible through option strategies |
| Main costs | Spread, commission (where applicable), and overnight financing | Purchase price, commissions (where applicable), and bid-ask spread | Commission, exchange fees, and margin requirements | Premium paid, commissions, and time decay (for buyers) |
Spread betting, available in the UK and Ireland, is economically similar to a CFD but structured as a bet on price movement per point, with different tax treatment. For a longer comparison of derivatives against pooled products, see CFDs compared with ETFs.
Rules differ by country, and this affects whether you can trade CFDs at all.
United States. CFDs are not offered to US retail clients. Under US law, these contracts would need to trade on a registered exchange to be sold to retail investors, and because CFDs are over-the-counter products, this effectively rules them out. Oversight sits with the SEC and CFTC.
United Kingdom, European Union, and Australia. CFDs are legal and regulated for retail clients, with the leverage caps, close-out rule, and negative balance protection described above, enforced by the FCA, ESMA and national regulators, and ASIC.
Singapore, South Africa, and the United Arab Emirates. CFDs are available through regulated brokers, overseen by the Monetary Authority of Singapore, the Financial Sector Conduct Authority, and the Securities and Commodities Authority.
India. CFDs are not available on domestic Indian exchanges and are not regulated by SEBI or the Reserve Bank of India, so retail investors do not have access through local regulated platforms. As context for why regulators limit leveraged retail derivatives, SEBI’s own study of India’s equity futures and options market found that 93 per cent of individual traders made losses between the 2022 and 2024 financial years.
The process is the same across most regulated brokers, and it follows a logical order.
Learn the product first. Understand margin, leverage, the spread, and the close-out rule before risking money. This article covers the core mechanics.
Choose a regulated broker. Confirm the broker is authorised by a recognised regulator in your region, and read its fee schedule and risk disclosure.
Understand the full cost. Add up the spread, any commission, and the overnight financing for the markets you plan to trade.
Practise on a demo account. Most brokers offer a risk-free simulation so you can see how positions, margin, and close-outs behave before using real funds.
Size positions to your account. Decide in advance how much of your capital any single trade can risk, and use stop-losses to define the exit.
You can see the range of markets available on EBC’s CFD instruments and open a trading account when you are ready.
CFDs are complex and leveraged, and the regulator's loss data show that most retail accounts lose money. A beginner can learn to trade them, but the learning is best done slowly, on a demo account, with small position sizes and a firm grasp of how leverage and close-outs work. The product does not reward guessing. It rewards understanding the mechanics and controlling risk on every trade.
You profit if the market moves in the direction of your position. A long position gains when the price rises. A short position gains when the price falls. You settle the difference in cash at closing.
Margin is the deposit you put down to open a position, set as a percentage of the full position value. For major currency pairs, the retail margin is 3.33 per cent, which is 30:1 leverage.
A margin call is a warning that your account is running low on funds to support open positions. Under UK and EU rules, the broker must close positions once equity falls to 50 per cent of the required margin.
You can, but daily financing charges accrue on the full position value, which makes long holding periods expensive. CFDs are designed for short-term positions.
No. You hold a contract that tracks the price. You receive no ownership, no voting rights, and no delivery of the asset.
Forex is one of the markets you can trade as a CFD. A forex CFD tracks the price of a currency pair. CFDs also cover indices, commodities, shares, and other assets.
CFD trading works by turning a simple idea, the difference between an opening and closing price, into a flexible way to trade rising and falling markets with leverage. The mechanics are not hard to learn: position size sets your profit and loss, margin sets your exposure, and the close-out rule caps how far a losing trade can run.
What separates traders who last from those who do not is respect for the two numbers regulators keep publishing: the leverage caps and the loss rates. Read the fee schedule, size each position against your account, and treat the demo account as the place to make your early mistakes. The product will still be there when you understand it.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
