What Is a CFD? CFDs vs Spot Forex Explained
What is a CFD? How a contract for difference makes or loses money, how it compares with spot forex and futures, and what leverage and overnight fees mean.
Open a gold chart, an index or a currency pair on almost any retail platform and the small print says the same thing: you are trading a CFD. Few beginners stop to ask what they have actually bought, and the answer changes how you should think about cost, leverage and risk.
Quick answer: A CFD, or contract for difference, is an agreement between you and a provider to settle the change in an asset’s price between the moment you open and the moment you close. You never own the gold, shares or currency. If the price moves your way, the provider pays you the difference; if it moves against you, you pay it.
What is a CFD? The contract for difference in plain terms
A contract for difference is a derivative: its value comes from something else, called the underlying. The underlying can be a currency pair, gold, oil, a stock index such as the S&P 500 or a single company’s shares. The contract itself is private. It sits between you and the firm that offers it, usually called the CFD provider or broker, and it is never traded on an exchange.
The deal is simple to state. You pick a size and a direction. When you close, the provider compares the closing price with the opening price and multiplies the difference by your size. That amount, positive or negative, is added to or taken from your account. Nothing else changes hands. No ounce of gold is set aside with your name on it, and no share appears on a company register.
Because you only ever settle a difference, a CFD lets you profit from a falling price as easily as from a rising one. To bet on a fall you sell first, which is called going short, and buy back later. With real shares you would have to borrow them first; with a CFD, the sell button is just there. Our guide to long vs short in forex covers the idea in detail.
CFDs were first used in London in the early 1990s by institutions that wanted exposure to shares without paying stamp duty on a purchase. Retail platforms adopted them later because one contract format can cover thousands of markets with the same account, the same margin system and the same order ticket. That convenience is why a gold chart and a EUR/USD chart look identical on your screen, even though the markets behind them are very different. The Academy’s Gold, Oil and Indices course starts from exactly this point.
How a CFD position makes or loses money
Every CFD profit or loss comes from one formula:
Profit or loss = (closing price − opening price) × position size, reversed in sign for a short position, minus costs.
The position size is expressed in the units of the underlying: ounces for gold, barrels for oil, index points for an index, units of the base currency for forex. Providers group these into lots or contracts, and the contract size is set by the provider, not by any exchange. A gold lot is often 100 ounces; an index CFD is often quoted at $1, $10 or another amount per point. Read the contract specification on your own platform before you trade anything new.
Take gold at an illustrative price of $4,000.00 an ounce. You buy 0.10 lots, which is 10 ounces on a 100-ounce contract. Each $1 move in gold is worth $10 to you.
- Gold rises to $4,050.00: (4,050 − 4,000) × 10 = +$500.
- Gold falls to $3,950.00: (3,950 − 4,000) × 10 = −$500.
If you had sold 0.10 lots instead, the results would swap: −$500 if gold rose to $4,050 and +$500 if it fell to $3,950. The provider’s profit is your loss and the other way round, at least on that contract.
Costs that come out of every trade
Three kinds of cost reduce that gross result. The spread is the gap between the buy and sell price; you pay it the moment you open. With a $0.30 spread on gold, 10 ounces cost you $3 before the price has moved. Some accounts add a commission per lot. And if you hold past the daily cut-off, usually 22:00 UK time, you pay or receive overnight financing, covered below. The Academy lesson on trading costs shows how the three add up.
Margin: the deposit, not the price
You do not pay the full value of a CFD position. You put down margin, a deposit the provider holds while the trade is open. Ten ounces of gold at $4,000 is worth $40,000. At the UK and EU retail limit for gold of 20:1, the margin is $40,000 ÷ 20 = $2,000. Your profit or loss, though, is worked out on the full $40,000. A 5% fall in gold, to $3,800, costs $2,000: the entire deposit. That gap between what you put down and what you are exposed to is leverage, explained step by step in our guide to leverage in forex.
CFD vs spot forex vs futures
Retail traders meet three ways of trading price movement, and the names get mixed up.
Spot forex, in the strict sense, is the market where banks and companies exchange currencies for delivery, normally two business days later. A company paying a supplier in euros uses it. Retail traders almost never take part in that market directly.
What a retail broker calls “spot forex” is a rolling spot contract. It is priced from the spot market, but it is never delivered: each night the open position is rolled forward to the next value date, and a swap is charged or paid for doing so. In legal terms it is a contract for difference on a currency pair. The UK’s Financial Conduct Authority says outright that its CFD rules cover rolling spot forex (FCA PS19/18). So, for most readers, CFD vs spot forex is a question of labels: a forex position at a retail broker already is a CFD.
Futures are different. A future is a standardised contract to buy or sell a fixed amount of something on a fixed date, traded on a regulated exchange and settled through a clearing house. The exchange sets the contract size (the euro future on the Chicago Mercantile Exchange covers €125,000), the expiry months and the margin. Everyone trades the same contract at the same visible prices, and there is no daily financing charge: the cost of carrying the position is built into the futures price instead, which is why a future usually trades a little above or below spot.
Which one suits a beginner?
For small accounts, CFDs and rolling spot have practical advantages: positions as small as 0.01 lots, one account for many markets, and losses capped at the money in the account under UK and EU rules. Futures offer transparent exchange prices and no dealing against your own provider, but the contracts are large, the margin is set per contract rather than as a ratio you can scale down, and a gap can leave you owing more than you deposited. Micro futures have narrowed the size gap on some markets. Either way, the risk comes from size and leverage, not from the wrapper. Our comparison of forex vs stocks covers the same question from the share-dealing side.
Overnight financing: the cost of holding a CFD
A CFD gives you exposure to the full value of a position while you only pay a deposit. In effect the provider is lending you the rest, and it charges interest on that loan for every night the position stays open. This charge is called overnight financing, and on forex it goes by the name swap or rollover.
For index, share and many commodity CFDs, a typical formula is:
Daily financing = position value × (benchmark rate ± provider’s markup) ÷ 365
The benchmark is an overnight interbank rate for the currency of the contract. Long positions usually pay the benchmark plus the markup. Short positions usually receive the benchmark minus the markup, and pay if that number is negative. Some providers divide by 360 for certain currencies. These are typical arrangements; your provider’s terms decide the real numbers.
Here is an illustrative case. You hold a long US index CFD worth $26,000. Assume a benchmark of 4.0% and a markup of 2.5%, so 6.5% a year. One night costs $26,000 × 0.065 ÷ 365 = $4.63. Twenty nights cost about $93; sixty nights about $278. The spread you paid to open might have been a couple of dollars.
Three details catch people out. Financing is charged on calendar nights, so the weekend is paid for too; providers usually collect it as a triple charge on one weekday, often Friday for index CFDs and Wednesday for forex. The charge is on the full position value, not on your margin, so a $2,000 deposit carrying $26,000 of exposure pays interest on $26,000. And some CFDs, often those on oil, are priced from a futures contract instead. They may carry no daily financing, but they expire or roll to the next contract month, and the roll can come with a price adjustment.
On forex, the swap comes from the difference between the two currencies’ interest rates, plus the broker’s markup, and it can be a credit or a charge. Our guide to forex swap walks through the calculation. The cost stack below adds a forex swap to the spread and commission, so you can see how quickly nights add up against a short-term target.
Spread = pips × $10 × lots. Commission and swap are quoted per lot. A trade must earn more than the total before it makes anything.
For a trade held for a few hours, financing barely matters. For a position held for months, it can cost more than every spread you paid that year. That is why CFDs are usually described as instruments for short- and medium-term trading, and why a long-term investor who wants gold or an index for years usually looks at owning the asset or a fund instead.
CFD leverage limits for retail clients
In 2018 the European Securities and Markets Authority (ESMA) capped the leverage that CFD providers could offer retail clients across the EU, from 1 August that year. National regulators have since written the same limits into their own permanent rules, and the FCA applied them in the UK from 1 August 2019. The caps on opening a position are:
| Underlying | Maximum leverage | Margin as % of position |
|---|---|---|
| Major currency pairs | 30:1 | 3.33% |
| Other currency pairs, gold, major stock indices | 20:1 | 5% |
| Other commodities, other stock indices | 10:1 | 10% |
| Individual shares and other underlyings | 5:1 | 20% |
| Cryptocurrencies | 2:1 | 50% |
Under ESMA’s definition, a “major” pair combines two of these six currencies: the US dollar, euro, yen, pound, Canadian dollar and Swiss franc. That means AUD/USD and NZD/USD count as non-major and carry the 20:1 limit. Gold sits with the major indices at 20:1; oil falls into the 10:1 group.
The same package of rules added three more protections: a margin close-out at 50% of the required margin, measured per account; negative balance protection; and a ban on bonuses and other incentives to trade. Providers must also print a standard risk warning showing the percentage of their own retail accounts that lose money. When ESMA reviewed providers’ accounts before the rules, it found that between 74% and 89% of retail CFD accounts typically lost money.
These limits apply to clients of firms regulated in the UK and EU, and similar caps exist in Australia. Clients classed as professional can be offered more leverage but lose some protections, and firms regulated offshore often advertise 1:500 or more. Higher leverage does not change what a price move does to your money; it only lets you open a bigger position with the same deposit. Pick a regulator below to see what usually comes with it, then check the details on the regulator’s own website. The Academy lesson on regulation explains how to read a licence.
- 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.
Negative balance protection and the close-out
Leverage creates a specific danger: a position can lose more than the margin behind it. If a market jumps far enough before your position is closed, the loss can exceed everything in the account. Before 2018 that could leave a retail client owing the provider money.
Negative balance protection removes that debt for retail clients of UK and EU firms. If a gap or a crash takes your account below zero, the provider resets it to zero and absorbs the rest. The 50% margin close-out is the other half of the design: the provider must start closing positions once your equity falls to half of the margin your open trades need, which is meant to stop most accounts reaching zero in the first place. Our full guide to negative balance protection covers the 2015 Swiss franc shock that pushed regulators to act, and our guide to margin call and stop out works through the 50% rule with numbers.
Neither protection saves your deposit. They limit the worst case to “everything in the account”, which is still a total loss. And futures, as noted above, are not covered: on an exchange-traded contract, a loss beyond your margin is a debt you owe.
Why “you never own the asset” matters
The phrase sounds like a technicality. In practice it shapes four things about every CFD you hold.
You have no rights in the underlying. A share CFD carries no vote at the company meeting. Dividends are usually passed through as a cash adjustment, credited to longs and charged to shorts, and that adjustment is set by the provider’s terms. A gold CFD gives you no metal to collect, and an oil CFD has no barrels behind it in your name.
Your counterparty is the provider. The contract is a promise from one firm. If that firm fails, your claim is against it, and what you recover depends on how client money was held and on any compensation scheme. Under UK and EU rules client money must be kept in separate bank accounts from the firm’s own money, which is called segregation; the diagram below shows why it matters. Our guide to segregated accounts explains the details.
Segregation means the broker holds client money in separate bank accounts it cannot use for its own business. Toggle to see what happens if the broker fails.
The provider sets the price you trade on. CFD prices are drawn from the underlying market, but the provider quotes them, adds its spread and decides how orders are filled. Some providers pass orders to banks and other liquidity providers; others take the opposite side themselves and manage the risk across all clients. Both models are legal and both should follow a written execution policy. The lesson on how brokers work shows the difference.
Holding is never free. Owning an ounce of gold costs storage and nothing more. Holding the same exposure through a CFD costs financing every night, because you are borrowing most of the position’s value. That is one reason the regulators’ loss figures matter for anyone planning to buy and hold through a CFD.
Common mistakes with CFDs
Treating the margin as the risk
The $2,000 deposit on a gold position is not the most you can lose on it. Your profit and loss run on the full $40,000, so a stop loss and a position size chosen from it are what limit the loss on a trade. The leverage and margin lesson shows how to size from risk rather than from available margin.
Ignoring financing on long holds
A swing trade that sits for six weeks pays six weeks of financing. Check the overnight rate on the contract before you open, and include it in your target. On some index CFDs, financing over a few months can be larger than the move you are hoping for.
Assuming every contract is the same size
A 1.00 lot on EUR/USD, on gold and on an index are three different exposures, and two providers can define the same market differently. Open the contract specification, work out the value of a $1 or one-point move, and only then choose a size. Our XAU/USD trading guide shows the calculation for gold.
Forgetting the market closes
CFDs follow the hours of their underlying markets. Index and commodity CFDs often pause daily, and nearly everything closes at the weekend. Prices can reopen well away from where they stopped, past your stop. Our guide to the forex weekend gap explains what happens to orders when that occurs.
Thinking offshore leverage is a feature
An account offering 1:500 lets you open a position 16 times larger than the UK and EU retail limit would allow on the same deposit, often without a 50% close-out or negative balance protection. The higher number is extra room to lose money faster.
Frequently asked questions
What is a CFD in simple terms?
A CFD, or contract for difference, is an agreement with a provider to exchange the change in an asset's price between when you open and when you close. You choose a size and a direction. If the price moves your way, the provider pays you the difference; if not, you pay it. You never own the asset itself.
Is forex trading the same as CFD trading?
At a retail broker, usually yes. What brokers call spot forex is a rolling spot contract that is never delivered and is rolled forward each night with a swap. Regulators such as the UK's FCA treat rolling spot forex as a CFD, so the same leverage limits, close-out rule and negative balance protection apply.
Can you lose more than you deposit with CFDs?
Retail clients of UK and EU regulated firms cannot, because negative balance protection resets a negative account to zero. Clients of firms regulated elsewhere, and clients classed as professional, may not have that protection, so a large gap could leave them owing money. Futures traded on an exchange carry no such cap.
What is the difference between a CFD and a futures contract?
A CFD is a private contract with your provider, usually with no expiry, a provider-set size and daily financing. A future is a standardised contract traded on an exchange, with a fixed size, a fixed expiry date and margin set by the exchange. Futures build the cost of carry into the price instead of charging nightly financing.
Why do I pay a fee for holding a CFD overnight?
You only deposit margin, so the provider effectively lends you the rest of the position's value. Overnight financing is the interest on that loan, worked out on the full position value, usually from a benchmark rate plus a markup. Short positions may receive a small credit or pay a charge, depending on the rate.
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