Cfd account
Family I · Instruments
Not to be confused with cfd, cfd trading, cfd analysis.
A CFD account is a brokerage account used to hold and trade contracts for difference, derivative instruments that pay the difference between an opening and a closing price of an underlying asset. Positions are cash-settled, so the underlying shares, currencies, commodities or indices are never delivered. The account's equity moves with unrealised profit or loss on open positions, and margin requirements, leverage limits and eligible instruments are set by the broker and by local regulation.
How a CFD account works
Opening a position creates a contract between the client and the broker rather than a purchase of the underlying asset. The account is marked to market, so profit or loss is credited or debited continuously while the position is open. Required margin is a percentage of notional exposure; the percentage, and therefore the maximum leverage, varies by broker, by instrument and by the client's regulatory jurisdiction.
Costs typically include the spread, overnight financing on leveraged positions, and any commission on certain instruments. Because leverage magnifies both gains and losses, a small adverse price move can consume a large share of the account's equity.
Worked example
The same 6% rise in the underlying price produced a 30% return on the margin committed, because the position was leveraged. A 6% fall would have produced a comparable loss on margin.
What varies by provider and jurisdiction
- Maximum leverage and minimum margin rates are capped differently by different regulators, and some jurisdictions restrict CFD accounts for retail clients altogether.
- Negative balance protection, which prevents a client from owing more than the account balance, is mandatory in some jurisdictions and absent in others.
- Financing charges, commission schedules and the range of tradable underlyings are set by the individual broker.
Often confused with
- cfd
- A CFD is the derivative contract itself, while a CFD account is the brokerage account that holds and settles those contracts; the account is the container, the contract is the instrument, and the visible sign is whether the term refers to a tradable position or to the facility holding it.
- cfd trading
- CFD trading is the activity of buying and selling contracts for difference, whereas a CFD account is the account through which that activity is conducted; the activity is what happens, the account is where it happens, and the visible sign is whether the phrase describes an action or an account.
- cfd analysis
- CFD analysis is the study of price behaviour, positioning or risk in contracts for difference, while a CFD account is the brokerage account used to execute and hold them; analysis produces information, the account executes trades, and the visible sign is whether the term names a research activity or a trading facility.