# What Is a CFD?

> A CFD lets you trade price moves without owning the asset. Learn how contracts for difference work, margin, overnight costs, where they are legal and the risks.

Source: https://learn.tradelabsai.com/markets/what-is-a-cfd/  
Track: Markets and Instruments · Level: Beginner · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "What Is a CFD?", https://learn.tradelabsai.com/markets/what-is-a-cfd/

A contract for difference, or CFD, is an agreement between you and a broker to exchange the difference in an asset's price between when you open the contract and when you close it. You never own the underlying share, currency or commodity. If the price moves in your favour, the broker pays you the difference; if it moves against you, you pay the broker.

## How a CFD trade works

**Example: A CFD on a share**
A share trades at £10.00. You buy a CFD on 1,000 shares, an exposure of £10,000. With 5:1 leverage, the broker asks for 20% margin, £2,000.
If the price rises to £10.50 and you close, you gain £0.50 × 1,000 = £500, a 25% return on your margin.
If the price falls to £9.50, you lose £500, 25% of your margin. A fall to £8.00 would wipe out the entire £2,000.

You can open a CFD to profit from a rise (going long) or a fall (going short) just as easily. Many brokers offer CFDs on thousands of shares, indexes, currencies, commodities and cryptocurrencies from one account.

## Costs of trading CFDs

- **Spread:** the broker quotes a buy and a sell price; the gap is a cost on every trade.
- **Commission:** charged on share CFDs at some brokers.
- **Overnight financing:** a long position held past the daily cut off is charged interest on the full exposure, not just the margin. Short positions may receive or pay a smaller amount. Over weeks or months this adds up. See [Financing and Overnight Costs](https://learn.tradelabsai.com/orders/financing-and-overnight-costs/).
- **Other fees:** currency conversion and, at some brokers, inactivity fees.

## Where CFDs are allowed

CFDs are popular in the UK, Europe, Australia and many other countries. They are **not permitted for retail traders in the United States**, where similar exposure is gained through listed futures, options and ETFs instead.

In the European Union and the UK, regulators restricted retail CFDs in 2018. The rules include:

| Asset class | Maximum retail leverage |
|---|---|
| Major currency pairs | 30:1 |
| Minor pairs, gold, major indexes | 20:1 |
| Other commodities, minor indexes | 10:1 |
| Individual shares | 5:1 |
| Cryptocurrencies | 2:1 |

Brokers must also close positions when margin falls to half of the required level, protect retail clients from losing more than their deposit, and publish the percentage of retail accounts that lose money. Those published figures are usually well above half, which tells you how hard short term leveraged trading is.

## CFDs vs owning the asset

| | CFD | Owning the asset |
|---|---|---|
| Ownership | None; a contract with the broker | You own the shares or coins |
| Leverage | Built in | Only with a margin account |
| Going short | Simple | Requires borrowing shares |
| Dividends | Cash adjustments instead of real dividends | Real dividends and voting rights |
| Holding costs | Daily financing | None for fully paid shares |
| Counterparty | The broker | The exchange and clearing system |
| Taxes | Differ by country; in the UK, CFD gains are subject to capital gains tax but not stamp duty | Standard rules |

## Risks

- **Leverage:** losses grow as fast as gains, and margin calls can close positions at the worst moment.
- **Counterparty risk:** your contract is with the broker, so the broker's financial strength and regulation matter. See [How to Choose a Broker](https://learn.tradelabsai.com/industry/how-to-choose-a-broker/).
- **Gaps:** prices can open far from the previous close, skipping your stop.
- **Financing drag:** long term CFD holdings are usually expensive compared with owning the asset.

## Frequently asked questions

### Can you lose more than you invest with CFDs?

Under UK and EU retail rules, brokers must provide negative balance protection, so retail clients cannot lose more than their account balance. Elsewhere, and for professional clients, losses can exceed deposits.

### Why can US residents not trade CFDs?

US rules on over the counter derivatives effectively prohibit offering CFDs to retail customers, so regulated US brokers do not provide them.

### Are CFDs good for long term investing?

Usually not, because daily financing costs on the full position size add up over time. They are mainly used for short term trading and hedging.

## Sources

- European Securities and Markets Authority, [Product intervention measures on CFDs](https://www.esma.europa.eu/press-news/esma-news/esma-agrees-prohibit-binary-options-and-restrict-cfds-protect-retail-investors)
- Wikipedia, [Contract for difference](https://en.wikipedia.org/wiki/Contract_for_difference)

## Continue learning

- Next lesson: [What Is a Contract?](https://learn.tradelabsai.com/markets/what-is-a-contract/)
- Previous lesson: [What Is a Derivative?](https://learn.tradelabsai.com/markets/what-is-a-derivative/)
- Related: [What Is a Derivative?](https://learn.tradelabsai.com/markets/what-is-a-derivative/): A derivative is a contract whose value comes from another asset. Learn the main types, futures, options, swaps and forwards, why they exist and their risks.
- Related: [CFD Trading](https://learn.tradelabsai.com/markets/cfd-trading/): How CFD trading works in practice: opening positions, margin and leverage limits, overnight financing, stop orders, choosing a broker and managing risk.
- Related: [Leverage](https://learn.tradelabsai.com/markets/leverage/): Leverage lets you control a larger position with less money. Learn how leverage ratios work, how they magnify gains and losses and how to use leverage safely.
- Related: [Margin](https://learn.tradelabsai.com/markets/margin/): Margin is the deposit you put up to borrow money or open leveraged positions. Learn initial and maintenance margin, margin calls, interest and how to avoid them.
- Related: [Financing and Overnight Costs](https://learn.tradelabsai.com/orders/financing-and-overnight-costs/): Holding leveraged positions overnight costs money. Learn margin interest, forex swaps, CFD financing, carry costs and how to include them in your trade plan.
- Related: [How to Choose a Broker](https://learn.tradelabsai.com/industry/how-to-choose-a-broker/): A practical checklist for choosing a broker: regulation, safety of funds, real trading costs, markets, platforms, support and the red flags to watch for.