Cfd model
Family I · Instruments
Not to be confused with cfd, cfd trading, cfd analysis.
CFD model refers to the contractual structure of a contract for difference, under which the parties settle only the net change in an underlying asset's price. The model is bilateral and derivative: no principal amount of the underlying changes hands, and the position is typically closed by an offsetting trade rather than by delivery. Its economics are driven by the notional size, the price movement, and any financing or commission charges applied by the provider.
How the model works
A CFD position is opened at a reference price and closed at a later reference price. The profit or loss is the difference between those prices multiplied by the number of units, adjusted for the contract's currency and any costs. Because the underlying is not delivered, the model relies on the provider's pricing and on the client's margin to cover adverse moves.
- Notional exposure is set by position size, not by capital paid upfront.
- Margin is a good-faith deposit; margin requirements vary by provider, instrument and regulator.
- Financing may be charged or paid on leveraged positions held overnight, and the rate varies by provider and asset class.
- Commission may apply on share CFDs, while index and forex CFDs are often quoted with a spread instead.
Worked example
A long CFD on an index quoted at 7,200 with a position size of 2 units per point. The position is closed at 7,260. Financing and commission are ignored for clarity.
A short position of the same size would show a loss of 120 on the same move. Costs and any financing charges reduce the result.
Where the model varies
The CFD model is not uniform across jurisdictions. Some regulators restrict the marketing or sale of CFDs to retail clients, cap leverage, or require negative balance protection; others permit wider terms. Contract specifications, margin rates, financing formulas and the availability of the product itself therefore differ by country and by provider, and should be checked against the applicable regime rather than assumed.
Often confused with
- cfd
- The slug 'cfd' names the contract itself, while 'cfd model' names the contractual and settlement structure that all such contracts share; the visible sign is that 'cfd' can refer to a single trade, whereas 'cfd model' describes the framework.
- cfd trading
- The slug 'cfd-trading' refers to the activity of buying and selling CFDs, whereas 'cfd model' refers to the mechanism those trades use; the visible sign is that 'cfd trading' appears in the context of orders and positions, while 'cfd model' appears in the context of contract mechanics.
- cfd analysis
- The slug 'cfd-analysis' refers to the study of price behaviour or performance of CFD positions, whereas 'cfd model' refers to the contractual structure being analysed; the visible sign is that 'cfd analysis' produces forecasts or metrics, while 'cfd model' describes how settlement works.