CFD
A Contract for Difference (CFD) is a leveraged synthetic position that mirrors the price movement of an underlying instrument without ownership of the instrument itself.
The trader profits or loses the difference between entry and exit price, multiplied by position size and contract size. CFDs are typically traded over the counter with a broker acting as counterparty, rather than on an exchange.
This page covers the mechanic; it is not trading advice.
What a CFD position represents
A long CFD on the S&P 500 index opened at 5,200 and closed at 5,225 produces a 25-point gain multiplied by position size and the contract's Point value, regardless of whether the trader could have bought the index's constituent shares. The broker is the counterparty, so the trader's profit on the contract is the broker's loss on that contract. Its net result depends on how much of that exposure it offsets against opposite client positions or passes on through a hedge.
CFDs do not transfer ownership. There are no shareholder voting rights and no dividend entitlement as a shareholder, and tax treatment can differ from direct ownership depending on the jurisdiction. When a share in the underlying, or a constituent of an underlying price-return index, goes ex-dividend, the broker typically makes a dividend adjustment on an undated CFD: long positions are credited and short positions debited, in a form and amount set by the broker's dividend adjustment terms, which can differ between long and short (for example where withholding tax reduces the long credit).
CFD margin and cost on a major index
A long position of one US 500 CFD contract, which tracks the S&P 500 index, at an illustrative price of 5,200, with a Contract size of 100 (broker-defined; here $100 per index point):
Notional position value = 5,200 × 100 = $520,000. At 1:100 leverage: margin held = $520,000 ÷ 100 = $5,200.
This margin requirement is several times what one standard forex lot holds at the same leverage, because one 100-per-point contract carries a large notional value. On a contract this size, a fractional position size, where the broker offers one, scales the margin and the value per point in proportion: 0.10 contracts at 5,200 and 1:100 would hold $520 in margin and produce $10 per point of movement.
CFD costs include spread (the same bid-ask differential as FX) and, on an undated (cash) index CFD, overnight financing: a swap-equivalent in which longs pay a benchmark overnight rate plus a broker markup and shorts are credited the benchmark minus the markup, paying when the markup is larger. A long CFD on a major index therefore pays daily financing whenever the benchmark rate plus the markup is positive — long an index is being long the asset and short cash. Dated index CFDs build the financing into the price instead.
Counterparty risk, the broker's solvency, is a real consideration, and it differs from the risk of buying the underlying instrument outright. The trader's claim is contractual against the broker, not against the underlying market.
Related terms
Related articles
Common questions
What is the difference between a CFD and the underlying spot?
A delivered spot purchase transfers ownership of the underlying asset: currency settled between banks, a share held with a custodian, or a physical commodity. CFDs transfer no ownership; the trader holds a contractual claim against the broker for the price difference. Delivered spot trades settle through interbank payment systems, clearing houses or custodians; CFD positions are usually bilateral, with the broker as counterparty. Retail spot forex at most brokers is not delivered, so it works like a currency CFD: the position rolls overnight through swap and the broker is the counterparty. CFDs offer leverage, fractional position sizes, and the ability to short without arranging stock loan — at the cost of broker counterparty risk and overnight financing structures that differ from delivered spot.
Why is CFD financing higher than the equivalent interbank rate?
A CFD is a bilateral contract between trader and broker, not a transaction in the underlying market. The broker funds the synthetic position from its own balance sheet or hedges through the underlying market, and adds a markup to the benchmark overnight rate to cover its funding, operational and counterparty costs and its margin. On undated (cash) index and share CFDs, the markup varies by broker, instrument and direction: as an illustration, with an assumed 2.5% markup over an assumed 4.00% benchmark (set at the upper limit of the US federal funds target range, 3.75–4.00%, which sits above the effective federal funds rate), a long S&P 500 CFD position of $60,000 notional pays 6.50% × $60,000 ÷ 360 = $10.83 a night. Shorts are credited the benchmark minus a markup and pay when the markup is the larger; a short share CFD can also carry a borrowing fee when the stock is hard to borrow. Some brokers state the markup over the benchmark, while others publish only the resulting financing figure for each direction; comparing across brokers requires comparing the same instrument, direction and position size.