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. CFDs are issued by brokers acting as counterparty, not by exchanges.
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, regardless of whether the trader could have bought the underlying basket of 500 stocks. The broker is the counterparty — when the trader profits, the broker loses, unless the broker has hedged the exposure in the underlying market.
CFDs do not transfer ownership. There are no shareholder voting rights, no dividend payment in the cash sense, no underlying-asset exposure for tax purposes in most jurisdictions. The broker applies a dividend adjustment that mirrors the underlying when the underlying pays a dividend; this is a price adjustment, not a cash payment.
CFD margin and cost on a major index
A long CFD on the US 500 index at a price of 5,200 with a contract size of 100 (broker-defined; some brokers quote per-point):
Notional position value = 5,200 × 100 = $520,000. ESMA major-index leverage cap = 1:10. Margin held = $520,000 ÷ 10 = $52,000.
This margin requirement is several times what a retail FX trader is accustomed to, because the index notional value is large. Retail accounts trading indices typically use fractional contract sizes — 0.10 contracts on this index would hold $5,200 in margin and produce $10 per point of movement.
CFD costs include spread (the same bid-ask differential as FX) and overnight financing (a swap-equivalent calculated against the broker's reference rate, which differs by direction and instrument). A long CFD on a major index typically pays daily financing — long an index is being long the asset and short cash, which costs financing in a positive-rate environment.
Counterparty risk — the broker's solvency — is a real consideration that does not exist when 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 spot transaction transfers ownership of the underlying asset (a currency, share, or commodity contract). A CFD transfers no ownership; the trader holds a contractual claim against the broker for the price difference. Spot positions clear through exchanges or interbank markets with separate counterparties; CFD positions are bilateral with the broker as 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 spot mechanics.
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 applies a markup to the financing rate to compensate for the operational and counterparty cost. Typical CFD financing rates run 2.5% to 5% above the underlying interbank rate annualised. The exact markup is published in the broker's swap or financing tables; comparing across brokers requires comparing the same instrument and direction at equivalent leverage.