What is CFD trading?

A Contract for Difference is a bilateral contract between trader and broker. The contract pays the difference between entry and exit price multiplied by position size and Contract size, on whatever underlying the contract references — an index, a share, a commodity, a currency pair.

There is no underlying ownership transfer. A long CFD on Apple shares does not produce share certificates, voting rights, or the ability to claim cash dividends in the conventional sense. When the underlying goes ex-dividend its price drops by roughly the dividend amount; the broker offsets this by crediting a dividend adjustment in cash to long CFD holders' account balances and debiting one from short holders. The adjustment is a cash transaction on the account balance, not a price-only adjustment to the CFD itself. Those amounts are set in the relevant broker's dividend adjustment terms and can differ between long and short positions, for example where withholding tax reduces the long credit, so the cash credit offsets most or all of the long holder's price-drop loss.

The broker is the counterparty on every CFD position, 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 Hedging; only the part it keeps on its own book moves that result. Whatever the broker's hedging, the trader's individual claim is contractual against the broker's balance sheet.

CFDs are leveraged. Position size scales beyond what cash on deposit could fund directly, with the broker holding Margin as collateral.

Worked example on a major-index CFD. A long US 500 CFD, 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), at a leverage ratio of 1:100 (broker- and account-type-defined):

On a 100-per-point contract, retail accounts can trade fractional position sizes where the broker offers them: 0.10 contracts at 5,200 on this index at 1:100 leverage would hold $520 in margin and produce $10 per point of movement. Where the value per point is large, fractional sizing is the practical mechanism for opening index CFD positions on accounts that cannot hold full-contract margin.

Brokers set leverage limits per instrument and account type — check the instrument specification before sizing any position.

CFDs carry the same Spread mechanic as forex: the position opens on one side of the quote and closes on the other, so a round trip costs half the spread at entry and half at exit, one full spread when the spread is the same at both ends; an exit into a wider spread, such as outside the underlying's main session, costs more. As an illustrative assumption, not a market figure: a CFD on a major index such as the US 500 or Germany 40 at 0.4–1.5 points, a major-share CFD priced without commission at 0.05–0.20% of the price, and a crude oil CFD at 3–6 cents per barrel. Actual spreads vary by broker, account type and session.

Overnight financing is a swap-equivalent calculated against the broker's reference rate (typically the relevant benchmark rate, with a markup that differs by direction and instrument). A long CFD on a major index pays daily financing at the reference rate plus the markup (long an index is being long the asset and short cash), so it pays whenever that sum is positive, even at a slightly negative rate. On the same index, a short CFD is credited the reference rate minus the markup, which is a positive amount only when the rate exceeds the markup; otherwise the short pays as well.

Some brokers also charge a per-trade commission on CFDs, particularly on share CFDs. Commission rates are published in the broker's contract specifications or fee schedule. The all-in cost per trade is the spread cost at entry and exit + commission on opening and closing where the broker charges it ± the overnight financing over every night the position is held (a debit, or a credit where the position earns more financing than it pays). Some brokers add a currency-conversion charge when profit and loss is in another currency, and a borrowing fee on short share CFDs.

CFD profit and loss follows a single formula: the difference between exit and entry price, multiplied by position size, multiplied by contract size. Direction flips the sign of the difference — a long position uses (exit − entry); a short position uses (entry − exit). The result is positive on a profitable trade and negative on a loss, expressed in the instrument's currency and converted to the account currency where the two differ.

Worked example, long position. Open 1 contract of the US 500 index at 5,200 (entry); close at 5,225 (exit); contract size = 100 per point. Gross P&L = (5,225 − 5,200) × 1 × 100 = 25 × 100 = $2,500. A 25-point favourable move on a 100-per-point contract produces exactly $2,500 of gross profit, measured at mid prices, before the cost layer covered in the previous section.

Worked example, short position. Open 1 contract of the US 500 index at 5,200 (entry); close at 5,175 (exit), a 25-point fall; contract size = 100 per point. Gross P&L = (5,200 − 5,175) × 1 × 100 = 25 × 100 = $2,500. The short profits the same dollar amount as the long when the price moves the same number of points in the favourable direction. A 25-point adverse move in either direction produces a loss of exactly $2,500 — the calculation is symmetric.

CFDs are issued against five main underlying categories, each with a structural quirk that shapes position sizing or cost expectations.

Equity index CFDs track an index, under broker labels such as US 500, Germany 40 and UK 100, and give leveraged, long-or-short index exposure without a futures account; dated index CFDs are priced from a forward level, as the FAQ below explains. The index itself is not traded directly anywhere: index funds, ETFs, futures, options and CFDs are all products built on it.

Individual share CFDs reference the price of a single listed equity (Apple, BP, Toyota). Because the trader holds no actual shares, the broker mirrors the economic effect of common corporate actions under its contract terms: a dividend by a cash adjustment to the account balance, a split by scaling the position size and opening price so the position's value is unchanged.

Commodity CFDs reference the spot price, or a futures contract month set by the broker's roll schedule, of physical commodities (gold, silver, crude oil, natural gas). On a CFD that references the spot price, overnight financing reflects the quote currency's interest rate adjusted for the commodity's own carry, such as the lease rate on gold and silver, with the broker's markup added to the rate a long pays and deducted from the rate a short receives; a CFD that references a futures price follows the broker's terms for financing and contract rolls.

Currency pair CFDs reference the spot interbank exchange rate between two currencies (EUR/USD, GBP/JPY) and are mechanically identical to spot forex at most retail brokers — the labels are often used interchangeably.

Cryptocurrency CFDs reference the price of a digital asset (BTC, ETH) without transfer of the underlying token, with the broker's spread and, where the broker charges it, a daily financing charge that owning the coin outright does not carry.

The trader's claim on a CFD position is contractual against the broker, not against the underlying market. If the broker becomes insolvent, the trader's positions and unrealised P&L become claims against the broker's estate, not directly recoverable through the underlying exchange.

Client money segregation means a broker holds client funds separately from its operational capital. Segregated client money is generally held outside the broker's estate; how it is returned in an insolvency, and at what cost, depends on the law that applies to the broker and to its client-money arrangements.

Buying the underlying directly, or trading exchange-listed futures, changes the form of counterparty risk rather than removing it. A spot share purchase on an exchange is held with a custodian; a futures position clears through a central counterparty that becomes the buyer to every seller and the seller to every buyer. CFDs trade off a different risk model: ease of access, leverage, and short access at the cost of counterparty exposure to the broker.

CFDs collapse the operational friction of leveraged trading. A retail trader can take exposure to indices, commodities, and individual shares without futures contracts or stock-loan arrangements, can size positions in fractions a futures contract would not permit, and can short most underlyings without arranging the borrow that an equity short demands. A single account holds positions across asset classes.

The trade-off is structural. No CFD transfers ownership of the underlying, so no shareholder rights, no dividend entitlement as a shareholder (any dividend adjustment comes from the broker under the contract), no buyback participation, no AGM vote. Tax treatment can differ from direct ownership. Every CFD position carries counterparty exposure to the broker itself.

The structure gives leverage, shorting and single-account access, and none of the shareholder rights that direct ownership carries.