Cfd trade
Family X · Account mechanics
Not to be confused with cfd, cfd trading, trade size.
CFD trade is a transaction in a contract for difference, a derivative that settles in cash based on the price movement of an underlying instrument such as a share, index, currency pair or commodity. The position is opened at one price and closed at another, and the difference is credited or debited to the trader's account. No physical delivery of the underlying asset takes place at any point.
How a CFD trade settles
A CFD trade has an opening price and a closing price. The profit or loss is the price difference multiplied by the number of contracts, adjusted for any financing charges, commissions or spreads applied by the provider. Because the underlying is never bought or sold, there is no settlement in shares, currency or physical goods; the account balance is simply adjusted in cash.
Most retail CFD trades are opened on margin, meaning only a fraction of the notional value is required as collateral. The margin requirement, leverage limits and financing rules vary by jurisdiction, by provider and by the asset class traded.
Worked example
Costs and risks specific to CFD trades
Because a CFD trade is leveraged, losses can exceed the initial deposit unless the provider applies negative balance protection, which is not universal. Overnight financing is typically charged on the full notional value, and spreads widen around market opens and news events. These terms are set by the provider and differ between firms and countries.
- Financing: charged daily on leveraged positions, based on a reference rate plus a provider markup.
- Spread: the difference between bid and ask at entry, which is an immediate cost.
- Margin calls: a fall in account equity below the maintenance requirement can trigger automatic closure of the trade.
Often confused with
- cfd
- A CFD is the contract itself, while a CFD trade is the act of opening, holding or closing a position in that contract; the visible sign is that the trade has an entry and exit price, whereas the CFD is defined by its terms.
- cfd trading
- CFD trading is the broader activity of buying and selling CFDs, whereas a CFD trade is one individual transaction within that activity; the visible sign is that trading is continuous and ongoing, while a trade has a start and an end.
- trade size
- Trade size is the quantity of contracts or units in a position, whereas a CFD trade is the position itself; the visible sign is that trade size is a number, while a CFD trade is an event with an opening and a closing.