What Is a CFD and How It Differs From Owning the Asset

CFD stands for contract for difference. You and the broker agree to exchange the difference between opening and closing price. The underlying asset never changes hands.

What it gives you

• Leverage. No need to post the full value of the asset, only margin.
• Short selling. Selling is as simple as buying, with no stock borrowing.
• Many markets from one account. Currencies, indices, shares, metals and oil in one terminal.
• Fractional size. You can take 0.1 of an index contract where a standard lot would cost tens of thousands.

What it takes away

• No ownership. No dividends as such, no voting rights, no transferring the asset to another broker.
• Holding cost. Swaps accrue nightly and over months become comparable to the price move itself.
• Counterparty risk. Your profit is an obligation of the broker. In insolvency you are an ordinary creditor, protected only by regulation.

Share adjustments

On share CFDs the broker compensates dividends: credited on longs, debited on shorts. Splits and other corporate actions are handled by adjusting size and price. It happens automatically, but read the terms — shorts are often debited in full while longs are credited net of withholding tax.

Where the risk really is

Not in the instrument but in the leverage. An index bought unleveraged is a moderate risk. The same index at 1:20 is wiped out by a 5% adverse move. EU and UK regulators require brokers to publish the share of losing retail accounts; typical figures run 74–89%.

Read next

• Leverage explained
• How index CFDs trade
• Overnight swaps