Contract for Differences (CFD)

Key takeaways

• A CFD (Contract for Difference) is a cash-settled derivative that lets traders speculate on an asset’s price movement without owning the underlying asset.
• CFDs trade over-the-counter (OTC) through brokers and typically carry high leverage, amplifying both gains and losses.
• CFDs have no expiration date and can be used to take long or short positions. They are banned for retail clients in the United States.

What is a CFD?

A Contract for Difference is an agreement between a trader and a broker to exchange the difference in an asset’s price from the time a position is opened to when it is closed. No physical delivery or ownership of the underlying asset occurs; settlements are made in cash.

CFDs let traders profit from both rising and falling prices: buy (go long) if you expect the price to rise, or sell (go short) if you expect it to fall.

How CFDs work

• Opening a position: You put up margin (a fraction of the full position value) and the broker provides the remaining exposure.
• Closing a position: The trade is offset and the net difference between opening and closing prices is credited or debited to your account.
• Leverage and margin: Brokers require a margin deposit and may have margin-maintenance levels. Leverage increases exposure but also increases the risk of margin calls.
• Pricing and fees: Brokers typically make money on the bid-ask spread; some charge financing (daily interest) on leveraged positions.
• Market structure: CFDs are traded OTC—prices are provided by brokers rather than on centralized exchanges.

Assets you can trade with CFDs

CFDs are offered on a wide range of instruments, including:
* Stock indices and individual stocks (or CFDs that mirror stocks)
Exchange-traded funds (ETFs)
Commodities and commodity futures (e.g., oil, agricultural products)
* Forex and bonds in some offerings

Note: CFDs on futures let you speculate on futures price moves but are not the same as holding a futures contract (CFDs have no expiration).

Benefits

• Low capital requirement due to margin trading—enter sizeable positions with smaller upfront cash.
• Ability to go long or short easily without borrowing the underlying asset.
• Access to many markets and instruments from a single broker platform.
• CFDs can reflect corporate actions (e.g., dividends), which may be passed through to the trader.

Risks and challenges

• Leverage risk: Small market moves can produce large losses; traders can lose their entire invested capital and may face margin calls.
• Counterparty/broker risk: Because CFDs are OTC and less regulated in some jurisdictions, outcomes depend on broker credibility and solvency.
• Wide spreads and volatility: During volatile markets, bid-ask spreads can widen, increasing transaction costs and reducing profit potential.
• Financing costs: Holding leveraged positions overnight typically incurs daily financing charges.
• Regulatory restrictions: CFDs are banned for retail clients in certain countries (notably the U.S.), and rules vary widely across jurisdictions.

Example

An investor buys a CFD equivalent to 100 shares of an ETF priced at $250 (not owning the ETF). Broker margin requirement: 5%.
* Full exposure: 100 × $250 = $25,000
Margin paid: 5% × $25,000 = $1,250
If the ETF rises to $300 and the trader closes the CFD:
* Closing value: 100 × $300 = $30,000
Profit (cash-settled): $30,000 − $25,000 = $5,000
Return on the $1,250 margin = 400% (illustrating leverage amplification), but losses would be similarly magnified if prices fell.

CFD vs. futures

• Expiration: Futures have set expiration dates; CFDs typically do not.
• Ownership and delivery: Futures can involve physical delivery or cash settlement at expiry; CFDs are always cash-settled and do not confer ownership.
• Trading venue: Futures trade on exchanges; CFDs trade OTC through brokers.

Legal status and availability

CFDs are banned for retail clients in the United States. They are available in many other jurisdictions, often under specific regulatory conditions. Countries where CFD trading is commonly offered include (but are not limited to): Belgium, Canada, Denmark, France, Germany, Italy, the Netherlands, New Zealand, Norway, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, and the United Kingdom. Regulatory frameworks and investor protections vary by country.

Conclusion

CFDs are versatile instruments for speculating on price movements across many asset classes with relatively low upfront capital. Their leverage and OTC nature can offer attractive opportunities but also introduce significant risks—especially counterparty exposure, margin calls, and amplified losses. Traders should fully understand margin mechanics, financing costs, and broker reliability before trading CFDs.