Orders and trading · updated October 21, 2026
What is a CFD (contract for difference) and what are the risks
A CFD is a contract with your broker in which you receive or pay the change in an asset's price (a stock, an index, a currency, gold), without buying the asset. It is almost always traded with leverage, which is why gains and losses are large compared with the money you put in.
How it works
You open a position betting on a rise (long) or a fall (short). If the price moves your way, the broker pays you the difference; if not, you pay it. You only put up a margin, for example 20% of the position value on stocks. For positions held overnight you pay a daily financing fee. In the EU, ESMA caps leverage for ordinary clients (30:1 on major currencies, 20:1 on major indices and gold, 10:1 on commodities and smaller indices, 5:1 on stocks, 2:1 on crypto), requires automatic close-out at 50% of margin and negative balance protection.
Worked example
You open a CFD on $5,000 of a stock, with 5:1 leverage, so you put up $1,000. The price rises 8%.
If the price had fallen 8%, you would have lost $400, or 40% of your money. Plus the financing fee for every night.
Worth knowing
EU brokers must show what percentage of ordinary clients' accounts lose money on CFDs. It is usually between 60% and 80%.
When a CFD can fool you
You do not own the stock: you get no vote, and dividends only show up as an account adjustment. The overnight fee: held for months, a CFD costs far more than the stock. Same name, different product: in some brokers' apps, CFDs and real shares look the same; check what you are buying.
Related terms
Learn it in the Academy
Questions about a CFD
CFD or the real stock?
For long-term investing, the real stock: you own it, you get dividends and you pay no daily fee. CFDs are built for short trades and carry high risk.
Why do most CFD traders lose money?
Because of leverage, frequent costs (spread, overnight fees) and too many trades. Leverage turns small moves into large losses.
Are CFDs legal?
In the EU and the UK, yes, through licensed brokers, with retail protections. In the US, CFDs are not allowed for retail investors.
These explanations are for information only. They are not a recommendation to buy or sell.
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