Contracts for difference, or CFDs, are agreements to exchange the price difference of a market between the moment you open a position and when you close it. You never take ownership of the underlying asset. You are simply speculating on whether its price will rise or fall.
CFDs are leveraged products. You put down a margin deposit to control a larger exposure, which makes gains and losses move faster than with unleveraged cash purchases. They are traded over the counter with a provider rather than on an exchange, and contract terms can vary by firm and by market.
How a CFD trade is structured
When you deal a CFD, the provider quotes a two-way price based on the underlying market. You can buy to go long if you think the price will rise, or sell to go short if you think it will fall. Your immediate execution price is affected by the spread between the bid price and the ask, plus any other dealing costs the provider charges.
PnL is calculated in a straight line. For a long position it is closing price minus opening price, multiplied by your position size. For a short position it is opening price minus closing price, multiplied by size. The result is then adjusted for fees, funding and any relevant corporate actions.
Many CFD markets are quoted per point. For example, if one contract is £1 per point and an index moves 50 points in your favour, your gross gain is £50. Share CFDs are often sized in number of shares, so a 10 pence move on 1,000 shares is £100 gross. Exact contract sizes and minimums differ by provider.
Margin, leverage and what that means for risk
CFDs use margin. You pay an initial margin to open a trade and must maintain a minimum level of equity in the account while it is open. Because margin is only a fraction of the full exposure, price moves translate into a larger percentage swing on your account balance. Leverage cuts both ways.
If your equity falls below the maintenance threshold, the provider can issue a margin call or close positions to reduce risk. Fast markets can gap through prices and cause slippage, so the exit level may be worse than your stop instruction unless the provider offers a guaranteed stop on that market. Negative balance protection may apply to some retail accounts in certain places, but rules vary by country and can change.
Risk management tools matter with CFDs. Traders commonly set stop losses, size positions using a fixed fraction of capital, and avoid holding concentrated exposures over illiquid periods or major announcements. None of these remove risk, they only frame it.
What you can trade via CFDs
Providers typically offer CFDs on a wide range of markets: individual shares, stock indices, foreign exchange pairs, interest rate and bond benchmarks, and raw materials such as oil, gold or wheat. These last ones are often called commodities. Some also quote CFDs on cryptocurrencies where local rules permit.
In most cases you are dealing a cash-settled contract that references a live underlying or a front-month future. Cash CFDs usually have no fixed expiry and incur daily funding adjustments. Futures-based CFDs mirror the relevant futures contract and may have an expiry date or automatic rollover. Product structure, tick sizes and trading hours vary by provider and by market.
Costs you will see on a CFD position
- Spread: the built-in difference between buy and sell quotes. Wider spreads raise your break-even distance.
- Commission: some share and specialist markets add a ticket fee on top of the spread. Others are spread-only. Pricing models differ by firm.
- Overnight financing: cash index and share CFDs usually apply a daily financing adjustment if you hold past the provider’s cut-off time. Longs tend to pay, shorts may receive or pay depending on rates and borrow costs.
- Borrow and adjustments: hard-to-borrow shares can carry an extra shorting fee. Stock dividends are reflected as cash adjustments, credited to longs and debited from shorts, typically on the ex-dividend date. Corporate actions like splits and rights issues are reflected mechanically in the CFD.
- Currency conversion: if the market and your account are in different currencies, providers may apply a conversion spread.
Always check a provider’s schedule, as calculation methods and cut-off times are not the same everywhere.
Example: long and short CFD profit and loss
Imagine you buy 2,000 share-CFDs in Company X at 250 pence. Your exposure is £5,000. If the margin requirement is 20 percent, you lodge £1,000 to open the trade, keeping the rest as free equity.
- If the price rises to 270 pence and you close, the 20 pence move on 2,000 shares is a £400 gross profit. From that, subtract the spread you paid on entry and exit, any commission, and any financing if you held overnight.
- If the price falls to 235 pence and you close, the 15 pence move against you on 2,000 shares is a £300 gross loss, again plus costs. If losses reduce equity near the maintenance level, the provider may ask for more funds or close the position.
For a short example, suppose you sell 5 index-CFD contracts at 7,500, where each contract is £1 per point. If the index drops to 7,420, that 80-point move is £400 gross profit. If the index rallies to 7,560, the 60-point move is £300 gross loss, plus costs.
How CFDs differ from owning the asset
Ownership: a CFD does not give you shareholder rights, voting, or custody of coins or commodities. It is a cash-settled agreement with a provider.
Time horizon: CFDs are often used for short to medium-term speculation or hedging. Long-term investors who want dividends, voting rights or direct custody usually buy the asset instead of a derivative.
Tax and regulation: the treatment of CFD profits, losses and funding varies by jurisdiction and by personal circumstances. Some countries restrict or prohibit retail CFD trading. Always check local rules and be aware they can change.
Execution and market access: with a CFD you rely on the provider’s pricing, execution and risk controls. Quality can vary. Exchange-traded alternatives such as futures and options offer different margining and transparency, but also have their own learning curves and risks.
Where traders use CFDs in practice
- Directional trading: take a view on earnings, a macro release or a trend without tying up the full cash amount.
- Short selling: express a bearish view through a sell position without arranging stock borrow.
- Hedging: offset risk on a shareholding or a portfolio index tilt ahead of an event. The hedge can be sized precisely and removed quickly.
- Cross-market ideas: trade indices, FX and commodities from the same account using consistent tools and position sizing.
CFDs are flexible, but that flexibility comes with leverage and counterparty exposure. If you choose to use them, focus on position sizing, clear exit plans and a solid understanding of your provider’s product terms. Crypto Daily does not offer brokerage or execution services, and features here are general. Product details and protections differ by provider and jurisdiction.