Cfd
Family I · Instruments
Not to be confused with forex, cfd trading, cfd analysis, cfd broker.
CFD stands for contract for difference, a derivative instrument that settles in cash based on the price change of an underlying asset. The two parties to the contract exchange the difference between the opening and closing prices, so no physical delivery of the asset occurs. CFDs are available on shares, indices, commodities, currencies and cryptocurrencies, and their availability and regulatory treatment vary by jurisdiction.
Structure and settlement
A CFD is an agreement between a buyer and a seller to exchange the difference in value of an underlying asset between the time the contract is opened and the time it is closed. The buyer profits if the price rises; the seller profits if it falls. Because no asset changes hands, the position is settled in cash, and the contract can be closed at any time during trading hours.
CFDs are typically traded on margin, meaning the trader deposits only a fraction of the notional value. This leverage magnifies both gains and losses. The required margin, the financing charges for holding positions overnight, and the spreads or commissions are set by the provider and vary widely by broker and by regulatory regime.
Worked example
Assume a trader buys 100 CFDs on a stock trading at 250.00, with a 5% margin requirement and a commission of 0.10 per CFD. The position is later closed at 255.00.
Overnight financing, if the position were held for more than one day, would reduce the net result. The return on the margin deposited is 490.00 / 1,250.00 = 39.2%, compared with a 2% move in the underlying.
Regulatory and cost variation
Rules on CFD trading differ by country. Some regulators restrict leverage, ban the sale of CFDs to retail clients, or require negative balance protection; others impose no such limits. Costs also differ: some providers charge only a spread, others a commission plus spread, and financing rates for long and short positions are set independently. No single figure for margin, leverage or cost applies universally.
Often confused with
- forex
- Forex is the spot or derivative market for currency pairs, while a CFD is a derivative contract that can reference currencies, shares, indices or commodities; the visible sign is that a forex quote always names two currencies, such as EUR/USD.
- cfd trading
- CFD trading is the activity of buying and selling CFD contracts, whereas a CFD is the instrument itself; the visible sign is that trading appears as a verb or process, not as a product name.
- cfd analysis
- CFD analysis is the study of price movements or market conditions to inform CFD positions, not the contract; the visible sign is that analysis refers to a method or report, not to a tradable agreement.
- cfd broker
- A CFD broker is the firm that provides access to CFD contracts, while a CFD is the contract provided; the visible sign is that broker denotes a company or intermediary, not an instrument.