🏦 Brokers·beginner

CFD (Contract for Difference)

Also called: contract for difference, cfds

A derivative contract where you profit or lose based on the price movement of an underlying asset — without owning the asset itself.

A CFD is a contract between you and your broker where you agree to exchange the difference in price of an asset between when you open and close the position. You don't own the underlying asset — you just bet on its price movement. CFDs can be opened on forex, stocks, indices, commodities, crypto, bonds, and more. The appeal of CFDs is leverage and simplicity. You can trade global assets from one account with high leverage (up to 1:500 in some jurisdictions) and you don't need to manage physical delivery, dividends, or settlement. CFDs also allow easy shorting — you can sell without borrowing the underlying asset. The downside is regulatory scrutiny. CFDs are banned for retail traders in the US because of consumer protection concerns about leverage and risk. In the UK, EU, Australia, and much of Asia, CFDs are legal but increasingly regulated — with leverage caps, risk warnings, and negative balance protection now standard.

Real trade example

The 2018 ESMA regulations capped retail CFD leverage at 1:30 on majors across the EU. The rules cut retail losses significantly — before the caps, most retail CFD traders lost 75%+ of deposits within six months. After the caps, the loss rate dropped to about 65%.

Related terms

Leverage

beginner

Borrowed money from your broker that lets you control a large position with a small deposit.

Broker

beginner

The company that gives you access to the forex market — the middleman between you and the currency you want to trade.

Spread Betting

intermediate

A UK-specific way to speculate on price movements of financial markets — treated as gambling, so profits are tax-free in the UK.

Margin

beginner

The amount of your own money locked up as collateral to open and hold a leveraged position.

Short

beginner

Selling something expecting its price to go down — the bearish opposite of going long.

Liquidity Provider

advanced

A bank or institution that provides buy and sell quotes to brokers — the wholesale source of forex prices and fills.

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