Contract for Difference (CFD)
A derivative product that allows you to speculate on price movements without owning the underlying asset.
A CFD is a derivative that tracks an asset's price without you owning it - the standard way retail traders get leveraged exposure to forex, indices, commodities, and shares.
A CFD is a derivative contract between you and a broker to exchange the difference in an asset's price from when you open to when you close the position. You don't own the underlying asset but can profit from price movements in either direction. CFD pricing mirrors the underlying asset plus financing costs on overnight positions, and leverage amplifies losses exactly as it amplifies gains. Regulators publish retail CFD loss rates above 70%, so the risk warning is not boilerplate.
How It Works
- No ownership of underlying asset
- Profit/loss = price difference × position size
- Can go long (buy) or short (sell)
- Leveraged product - amplifies gains and losses
Types of Contract for Difference (CFD)
Share CFDs
Based on individual stocks
Index CFDs
Based on stock indices (S&P 500, FTSE 100)
Commodity CFDs
Gold, oil, natural gas, etc.
Forex CFDs
Currency pair speculation
Trading Tips
CFDs have leverage - manage risk carefully
You may pay overnight financing charges
Understand margin requirements for each instrument
Contract for Difference (CFD) Example
Say you want exposure to Tesla earnings without $25,000 for 100 shares. Buy 100 Tesla CFDs at $250 and you mirror the stock dollar for dollar, long or short, paying spread plus overnight financing instead of the full outlay.
How Traders Use Contract for Difference (CFD)
Use share CFDs for short-term direction and hedging, not buy-and-hold: financing compounds against you over months. Check whether dividends adjust your position and whether your broker hedges or internalises flow.
Related Terms
Sources
- ESMACFD product intervention rules
- InvestopediaCFD definition
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