What is a CFD? How contracts for difference work, with a worked trade

The short answer

A CFD (contract for difference) is a contract between you and a broker that pays out the difference between an asset’s price when you open the position and when you close it. You never own the underlying share, index or currency; you put down a fraction of the position’s value as margin, which for a UK retail client is at least 20% on an individual share and 3.33% on a major currency pair. Gains and losses are calculated on the full position, which is why the brokers we score report that between 55% and 77% of their retail CFD accounts lose money (their own risk warnings, October 2026).

How does a CFD actually work?

When you buy a share through a stockbroker, you own a slice of a company. When you buy a CFD on that share, you own a contract with the broker that tracks the share price. If the price rises while your position is open, the broker pays you the difference multiplied by the number of contracts. If it falls, you pay the broker.

Three things follow from that structure:

• You can go short as easily as long. Selling a CFD you do not hold is just the other side of the same contract, so you profit if the price falls.
• You trade on margin. The broker asks for a deposit, not the full value. That is leverage, and it is the reason CFDs exist as a product. Our guide to what leverage is in trading covers it in depth; this page uses only what a CFD trade needs.
• The broker is your counterparty. Many CFD providers, Plus500 among them, are market makers that set their own prices. Your contract is only as good as the firm behind it, which is why the regulator and client money rules matter (see Is Plus500 safe? for one example worked through).

CFDs are offered on shares, indices, currencies, commodities and bonds. Spread bets work on the same mechanics; the differences are tax and availability, covered in spread betting vs CFDs.

A worked trade: buying a share CFD

The numbers below are an illustration, not a quote from any broker. The share is a fictional UK company, and the financing rate is a round figure chosen to show the calculation. Each broker publishes its own spreads, commissions and financing rates on its fee page.

The setup. The share’s mid price is 400p. The broker quotes a bid (sell) price of 399.8p and an ask (buy) price of 400.2p, a spread of 0.4p. A UK retail client is limited to 5:1 leverage on individual shares, so the margin is 20% of the position.

You buy 1,000 CFDs at the ask:

Financing is charged on the full position value, not on your margin, because the broker is in effect lending you the other 80%. Brokers usually set it as a benchmark interest rate plus their own markup, applied each night the position stays open past the daily cut-off. Ten nights costs little; ten months is a different matter.

If the share rises 5%. After ten nights the bid is 420p. You close at the bid: (420p − 400.2p) × 1,000 = £198.00. Take off £7.13 of financing and you keep £190.87, a 23.8% return on the £800.40 of margin, from a 5% move in the share.

If the share falls 5%. The bid is 380p. (380p − 400.2p) × 1,000 = −£202.00, plus £7.13 of financing, is a loss of £209.13, or 26.1% of your margin. The spread meant you started £4 behind, and the financing kept running whichever way the price went.

That symmetry is the whole product. Leverage of 5:1 turns a 5% move into roughly a 25% gain or loss on the deposit, with costs subtracted from both outcomes.

A worked trade: going short

Now sell 1,000 CFDs at the bid of 399.8p, expecting the price to fall. Position value is £3,998.00, margin £799.60.

• If the share falls to 380p (you close at the ask), the profit is (399.8p − 380p) × 1,000 = £198.00.
• Financing on a short works in reverse: some brokers credit the benchmark rate minus their markup, others charge both sides. At an illustrative net credit of 1.5% a year, ten nights adds £1.64, for £199.64.
• If the share rises to 420p instead, the loss is £202.00, or £200.36 after that small credit.

Dividends cut against shorts. If the share goes ex-dividend while you are short, the broker debits you an amount based on the dividend. A 10p dividend on 1,000 contracts is £100, which would take the £199.64 profit above down to £99.64. A long position receives a matching credit, although brokers may pay less than 100% of the gross dividend.

When does the broker close your position?

FCA rules require the broker to close positions when your account equity falls to 50% of the margin needed to keep them open. Take the long trade above with £1,000 in the account. Because the margin requirement is recalculated at the current price, the close-out arrives when the bid falls to about 333.6p, a drop of roughly 16.6% from 400p. At that point your equity is £333.56, and you have lost about two-thirds of your deposit before financing on a fall many shares see in a bad quarter.

The close-out rule is protection, not a guarantee. If the share gaps down overnight on bad results, the position closes at the first available price, which can be far below 333.6p. For retail clients, negative balance protection then caps the loss at the money in the account.

What protections do UK and EU retail clients get?

ESMA imposed temporary restrictions across the EU from August 2018. The FCA made its own version permanent in policy statement PS19/18, which applies to CFDs from 1 August 2019 and treats spread bets and rolling spot forex the same way. The main rules:

In the UK, crypto CFDs go further: the FCA has banned crypto derivatives for retail clients since January 2021, so the 2:1 tier does not apply to UK retail accounts.

These rules disappear if you ask to be treated as a professional client. Brokers market professional status as a way to get higher leverage; what you give up is negative balance protection, the close-out rule and the leverage caps.

Why do most retail CFD accounts lose money?

The standardised warning is the most useful number a CFD broker publishes, because the regulator makes it publish it. Here is what the risk warnings of brokers we score said when checked in October 2026:

Each figure is the broker’s own, taken from the disclosure covered in our safety guides on eToro, XTB and Pepperstone. Every entity calculates its own number over its own period, so the figures move from month to month and are not strictly comparable. A lower figure can reflect a different client mix, such as more clients holding unleveraged positions, rather than a kinder product.

The reasons are mostly arithmetic:

• Costs are certain, profits are not. The spread is paid on every round trip and financing on every night held. A trader who breaks even on price still loses money.
• Leverage turns normal volatility into large account swings. At 5:1, a 10% move in a share is a 50% move in the margin. At 30:1 on a currency pair, a 1.7% move is half the deposit.
• Close-outs lock in losses. A position that would have recovered may be closed at the 50% line first.
• Short holding periods. CFDs are built for short-term trading, where outcomes depend heavily on timing and costs compound with frequency.

None of this says anything about whether a broker is solvent or honest. It describes what the product does to most of the retail clients who use it.

CFD or owning the share: what is the difference?

The stamp duty saving is real but small next to financing on anything held for more than a few weeks. CFDs cannot go in a stocks and shares ISA or a SIPP. If what you want is to own shares, a share dealing account is the tool; several brokers we score, including XTB and Trading 212, offer both, and keeping the two accounts mentally separate is sensible.

CFD or spread bet?

For a UK resident, the main alternative to a CFD is a spread bet. The mechanics, leverage caps and retail protections are the same. The differences are tax and availability: spread betting profits are currently free of capital gains tax and stamp duty, but losses cannot be set against other gains, while CFD profits are taxable and CFD losses are allowable. Spread betting is also only offered in the UK and Ireland. Among brokers we score, Pepperstone offers both. The full comparison is in spread betting vs CFDs.

Can you trade CFDs in the US?

Not as a US retail client. Under the Dodd-Frank framework, a CFD on a single share or narrow-based index is a security-based swap, and the Securities Exchange Act makes it unlawful to enter one with a customer who is not an eligible contract participant unless it is traded on a registered national securities exchange. Retail CFDs are over-the-counter contracts with a broker, and no US exchange lists them, so US-regulated brokers do not offer them to the public. CFDs on broad indices and commodities fall under the CFTC’s swap rules instead, with the same practical result. Offshore brokers that accept US clients are operating outside US protections, and the CFD brokers we score generally do not onboard US residents.

Should you trade CFDs at all?

That is your decision, and this page is not encouragement either way. What the numbers say is plain: the product is leveraged, the costs are guaranteed, and most retail accounts at every broker in the table above lose money. If you do use CFDs, an FCA-authorised broker with negative balance protection, small position sizes and a clear exit plan limit the damage; they do not change the odds. For brokers that offer CFDs on currencies under UK rules, our best forex brokers ranking compares the FCA-regulated options on cost and protection, alongside reviews of IC Markets and the brokers above.