The CFD structure: synthetic exposure, broker as counterparty
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, 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 the dividend amount; the broker offsets this by crediting the dividend amount in cash to long CFD holders' account balances and debiting the same amount from short holders. The adjustment is a cash transaction on the account balance, not a price-only adjustment to the CFD itself — for the long holder the price-drop P&L loss is neutralised by the cash credit.
The broker is the counterparty on every CFD position. When the trader profits, the broker loses, unless the broker has hedged the exposure in the underlying market. Most regulated brokers run hedging programs for aggregate client exposure; the trader's individual claim is contractual against the broker's balance sheet.
CFD margin and leverage
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 CFD on the US 500 index at a price of 5,200 with a contract size of 100 (broker-defined; some quote per-point), at a leverage ratio of 1:100 (broker- and account-type-defined):
Formula
Position size × Contract size × Price = Notional value- Position size
- 1 contract
- Contract size
- 100
- Price
- 5,200
- Leverage
- 1:100
- Notional value
- $520,000
Margin required
$5,200
Retail accounts trading indices typically use fractional contract sizes — 0.10 contracts on this index at 1:100 leverage would hold $520 in margin and produce $10 per point of movement. 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.
CFD costs: spread, financing, and commission
CFDs carry the same Spread mechanic as forex: bid-ask gap paid at entry, again at exit. A typical major-index CFD quotes at 0.4–1.5 points spread; a major-share CFD at 0.05–0.20% of the price; a major commodity CFD at fractions of a cent per unit.
Overnight financing is a swap-equivalent calculated against the broker's reference rate (typically the relevant interbank rate plus a markup), differing 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. A short CFD on the same index typically receives a smaller positive amount.
Some brokers also charge a per-trade commission on CFDs, particularly on share CFDs. The commission is published in the contract specifications. The all-in cost per trade is spread + commission + average overnight financing for the holding period.
How CFD profit and loss is calculated
CFD profit and loss follows a single formula: the difference between exit and entry price, multiplied by position size, multiplied by contract size. The sign of the difference flips by direction — 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.
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 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.
What CFDs reference
CFDs are issued against five main underlying categories, each with a structural quirk that shapes position sizing or cost expectations.
Equity index CFDs reference the level of an index (US 500, Germany 40, UK 100) and are the practical retail vehicle for index exposure outside the futures market — the index itself is not traded directly anywhere.
Individual share CFDs reference the price of a single listed equity (Apple, BP, Toyota), with corporate actions (dividends, splits) mirrored to the CFD by cash adjustment to the account balance since the trader holds no actual shares.
Commodity CFDs reference the spot or front-month futures price of physical commodities (gold, silver, crude oil, natural gas), with financing rates reflecting carry costs on the underlying commodity rather than interest rate differentials.
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 spreads and financing rates typically much wider than equivalent spot crypto exchanges due to volatility and the hedging cost on the synthetic exposure.
Counterparty risk and the limits of broker protection
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.
Reputable brokers hold client funds separately from the broker's operational capital — a practice known as client money segregation. In the event of insolvency, segregated client money is returned to clients before unsecured creditors are paid.
Counterparty risk does not exist when buying the underlying directly. A spot share purchase on a regulated exchange is held with a custodian; a futures position clears through a central counterparty. CFDs trade off a different risk model: ease of access, leverage, and short access at the cost of counterparty exposure.
What CFDs do, and what they do not
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 payment in the cash sense, no buyback participation, no AGM vote. Tax treatment diverges from direct ownership in most jurisdictions. Every CFD position carries counterparty exposure to the broker itself.
The product fits short-term and tactical traders who want leverage, shorting, and unified-account access. It does not fit long-term holders who need the corporate-action and tax structure of direct ownership.
The retail loss statistic and what it means
The figure is a disclosure of observed outcomes, not a commercial claim — it reflects net P&L across real accounts over the reported period, not individual trade results. Reading it as '7–8 in 10 trades fail' misreads what is being measured.