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CFDs explained
A contract for difference lets traders speculate on price movement without owning the underlying asset. It also introduces leverage — and leverage is the single biggest reason most retail accounts lose money.
⚠ Read this first
CFDs are complex, leveraged products with a high risk of losing money rapidly. Across the industry, the majority of retail investor accounts lose money trading CFDs. The section below explains how they work so that risk is understood — not encouraged.
What is a CFD?
A contract for difference is an agreement to exchange the difference in an asset's price between the time a position is opened and the time it is closed. You never own the underlying share, currency or commodity; you simply gain or lose based on how its price moves. CFDs exist for many markets — indices, shares, commodities and currencies — which is why they are common in retail trading.
Long and short
Because a CFD is a contract on price direction, a trader can go long (profiting if the price rises) or short (profiting if the price falls). This flexibility is one reason CFDs are popular, but it does not change the fundamental risk: being wrong in either direction produces a loss.
Leverage and margin
CFDs are traded on margin, meaning you put up only a fraction of a position's full value. The ratio between the position size and the deposit required is called leverage. Leverage of 1:10, for example, means a small deposit controls a position ten times larger.
The crucial point is that leverage amplifies both gains and losses. A price move that would be minor on an unleveraged position can wipe out a leveraged one. This is why outcomes are so skewed toward losses for inexperienced traders, and why many regulators limit the leverage offered to retail clients.
Spreads, overnight costs and other charges
Trading a CFD is not free. The spread (the gap between the buy and sell price) is an immediate cost on every position. Holding a position overnight can incur a financing charge, and some markets carry commissions. These costs accumulate and work against a trader over time.
The honest summary
A CFD is a straightforward idea wrapped around a dangerous mechanism. The concept — profit from a price difference — is easy to grasp. The leverage attached to it is what turns small mistakes into large losses. Understanding that asymmetry is the whole point of this page.
Risk warning. Trading foreign exchange and contracts for difference (CFDs) is high risk and can lead to the loss of all invested capital. The majority of retail investor accounts lose money when trading CFDs. The material on this website is general education only, is not financial advice, and is not an offer or solicitation to trade.