What Is a CFD (Contract for Difference)? How CFD Trading Works, and Its Risks

What a CFD is, in plain English

A contract for difference is exactly what the name says: a contract between you and a provider, usually a broker, to settle the difference in an asset’s price between the moment you open a position and the moment you close it. If you buy, or go long, and the price rises, the provider pays you the difference; if it falls, you pay. You can also sell first, or go short, and profit if the price falls. CFDs exist on shares, stock indices, currencies, commodities and, outside the UK, cryptocurrencies. They were developed in London in the early 1990s, helped by the fact that a contract which never transfers shares does not attract UK stamp duty, and were later sold to the public through online platforms. The defining feature is that you never own anything except the contract itself.

How a CFD trade works: a worked example

Suppose a company’s shares trade at £10 and you open a long CFD on 1,000 shares, a position worth £10,000. Under the rules for retail clients in the UK and EU, the maximum leverage on individual shares is 5 to 1, so you must put down at least 20% as margin: £2,000. If the share rises to £10.50, a 5% move, you gain £500, which is 25% of your margin. If it falls to £9, a 10% move, you lose £1,000, half of your margin, and unless you have added more money the provider would normally close the position at that point, because retail rules require positions to be closed when the money in the account falls to half of the margin required. The same arithmetic works in reverse for a short position. Leverage does not change how far the share moves; it changes how much of your own money that move represents.

Prices do not always move smoothly. A share can open sharply lower after bad news overnight, jumping straight past the level at which you meant to close. For retail clients, negative balance protection means the loss cannot exceed the money in the CFD account, but everything in that account can still be lost.

What CFDs cost

The cost of a CFD is rarely a visible fee. Many providers charge no commission on index, currency and commodity CFDs and earn their money in other ways:

• The spread: you buy at a slightly higher price than you can sell at, so every trade starts with a small loss.
• Overnight funding: holding a leveraged position past the end of the trading day incurs a daily charge, usually a benchmark interest rate plus the provider’s fee, calculated on the full value of the position rather than on your margin.
• Commission on some share CFDs, depending on the provider and the market.
• Currency conversion when the asset is priced in a different currency from your account, commonly somewhere around 0.5% to 1%.
• A premium for a guaranteed stop, a stop-loss that is guaranteed to close at your chosen price, typically charged only if it is triggered.

Funding is the cost that catches people out, because it accrues on the whole exposure. At an illustrative all-in rate of 7% a year, the £10,000 position above costs about £1.92 a night, close to £58 a month, while the trader’s own money at stake is £2,000. Over a full year that comes to about £700, or 35% of the margin, before the share has moved at all. That is why CFDs are usually described as tools for short-term trading rather than long-term investing.

The rules that protect retail traders

After years of complaints about high leverage and aggressive marketing, the European Securities and Markets Authority restricted the sale of CFDs to retail clients in 2018. National regulators across the EU have since adopted those measures as their own, and the UK’s Financial Conduct Authority made equivalent rules permanent from 1 August 2019. They apply to retail clients; traders who qualify and choose to be treated as professional clients give them up.

• Leverage caps: 30:1 on major currency pairs; 20:1 on other currency pairs, gold and major indices; 10:1 on other commodities and minor indices; 5:1 on individual shares and other assets; 2:1 on cryptocurrencies.
• Margin close-out: positions must be closed when the money in the account falls to 50% of the margin required.
• Negative balance protection: a retail client cannot lose more than the money in their CFD account.
• No bonuses or other trading incentives to attract clients.
• A standard risk warning showing the percentage of the provider’s own retail accounts that lost money.

Two further rules depend on where you live. In the UK, the FCA has banned the sale of CFDs and other derivatives on cryptocurrencies to retail clients since 6 January 2021, and confirmed in 2025 that the ban stays even as it opened retail access to crypto exchange-traded notes. In the United States, CFDs count as swaps, which ordinary investors may trade only on regulated exchanges, so they are not offered to US retail clients. In February 2026, ESMA also said that ‘perpetual futures’ sold to retail clients are likely to fall within the same CFD rules.

CFDs versus owning the shares

Owning a share and holding a CFD on it can look similar on a screen, but they are different things. A shareholder owns part of a company, can vote, receives dividends and can hold for decades with no running cost beyond the platform fee. A CFD holder owns only a contract with the provider: dividends are usually reflected as cash adjustments, credited on long positions and debited on short ones, there are no voting rights, and you depend on the provider being able to pay what it owes. Tax can differ as well. In the UK, profits on CFDs are generally subject to capital gains tax, while spread betting, a close relative offered mainly in the UK, is usually free of capital gains tax for individuals, which is why many UK providers offer both. Neither changes the arithmetic of leverage.

Why most retail CFD traders lose money

Every regulated provider in the UK and EU must publish the share of its retail accounts that lose money trading CFDs, and those figures consistently show that a majority do. Leverage is the main reason: it turns ordinary price moves into large percentage swings on a small deposit, and close-out rules can lock in a loss before the market has a chance to recover. Costs are the second: spreads and funding are paid whatever happens, so a trader has to be right often enough to cover them. Behaviour is the third. Short holding periods, frequent trading and the urge to win back losses quickly are a poor combination with leveraged products. Research on day traders reaches similar conclusions, which is why regulators describe CFDs as complex products that are unsuitable for most people.

Leverage does not make a share move further. It makes the same move cost, or earn, a much larger share of the money you put down.

Who uses CFDs, and what to check

CFDs do have legitimate uses. Experienced traders use them to take short-term positions in either direction, and some investors use them to hedge a portfolio temporarily without selling it. Anyone considering them should check that the provider is authorised by their own country’s regulator, confirm which group company they are signing up with, read the provider’s risk warning, understand the overnight funding charge, and only use money they can afford to lose entirely. This guide is general education, not a recommendation to trade CFDs or advice on your circumstances.

This article is educational and general in nature. It isn’t personalized investment, tax, or legal advice — always weigh your own circumstances, or talk to a licensed professional, before making financial decisions.

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