What a CFD is

You tap “buy” on gold at $4,000 an ounce and a week later close the trade at $4,040. You made money on gold, but at no point did you own any.

A contract on the difference

STP / ECN brokerMarket maker

Your CFD is a contract between you and your broker. The broker may hedge it with liquidity providers or keep the other side itself, but the gold, oil or shares never pass to you.

A CFD (contract for difference) is an agreement with your broker to settle the change in a price. You open at one price and close at another, and the difference, multiplied by your size, is paid to you or taken from you:

Profit or loss = (Closing price − Opening price) × Size

For a sell (short) position the sign flips: you gain when the price falls. That makes going short as easy as going long.

You never own the underlying asset. There is no ounce in a vault with your name on it, no barrel and no shareholder vote. Your rights are against the broker, which is why its regulation matters as much as the price. Most retail forex is traded the same way, as CFDs or rolling spot contracts, so the mechanics are already familiar.

Holding overnight costs money

To hold a $40,000 position you put up only part of it as margin. The broker in effect lends you the rest, and charges for it each night the position stays open past the daily cut-off. On index and commodity CFDs this financing is usually a benchmark interest rate plus the broker’s markup, charged on the full position value. On gold and currencies it is shown as a swap per lot. A long position usually pays; a short may receive a little or still pay once the markup is taken.

One night a week is charged three times to cover the weekend. Which night varies: it is often Wednesday on gold and currencies and Friday on indices. Check the swap and the triple day in your platform’s contract specification.

Leverage caps and negative balance protection

Leverage lets a small deposit control a large position, and it magnifies losses exactly as much as gains. Since 2018, under rules set by the European Securities and Markets Authority and kept by the UK’s FCA, retail clients can open CFDs at no more than:

• 1:30 on major currency pairs
• 1:20 on gold, major stock indices and non-major pairs
• 1:10 on other commodities, including oil, and minor indices
• 1:5 on individual shares and 1:2 on crypto

The same rules make the broker close positions when your margin falls to half of what is required, and give each account negative balance protection: you cannot lose more than the money in your CFD account. They also require a risk warning. In its 2018 decision ESMA found that 74–89% of retail CFD accounts typically lost money. Australia’s regulator applies similar caps.

Try it

FCAASICCySECCFTC / NFAOffshore licenceUnregulated

• Supervised by a serious regulator
• Client money segregated
• Negative balance protection
• Compensation scheme

Region

Retail leverage cap

Compensation if the broker fails

Where to complain

Typical rules at the time of writing. Rules change; confirm on the regulator’s own website before opening an account.

Switch between FCA, CySEC and an offshore licence and compare the leverage cap and the negative balance protection ring: offshore, both usually disappear.

Quick check

Quick check

1. Question 1 of 4

   You buy 0.02 lots of gold (2 oz) at 4,000 and close at 3,985. What is the result before costs?

   A−$30B−$15C−$1,500

Go deeper: Negative balance protection · What is swap in forex? · Leverage in forex explained