A CFD (contract for difference) is an agreement with a provider to exchange the difference between the opening and closing price of an asset, without owning the asset. It lets you trade rising or falling prices with a deposit smaller than the full value of the position. That is exactly why leverage magnifies both gains and losses, and losses can be larger than expected.
How a CFD works
When you open a CFD you are not buying gold, an index or a currency. You enter a contract whose result depends on how the price changes between opening and closing. If price moves in favour of your position, the difference is credited; if it moves against you, it is debited.
- Notional value: the total size of the position.
- Margin: the part of the notional value the provider holds as collateral.
- Leverage: the ratio between notional value and margin. Limits depend on the jurisdiction and client type. See forex leverage for more detail.
Availability depends on where you live
Rules differ by country. CFDs are generally not offered to retail clients in the United States, whereas regulators in the United Kingdom and the European Union apply specific retail rules, including leverage limits. Check the current rules of your own regulator (for example the FCA in the UK) and your provider's risk disclosure before trading. This article does not tell you whether a product is available or suitable for you.
Usual costs
| Cost | What it is | Where to check it |
|---|---|---|
| Spread | Difference between the buy (ask) and sell (bid) price | Instrument specification |
| Commission | Fixed or proportional charge, depending on the account | Provider's fee schedule |
| Swap | Charge or credit for holding a position overnight | Contract specification |
| Slippage | Difference between the expected and executed price | Execution history |
The guide on spread, swap and slippage explains each cost in more detail.
Illustrative example: margin and a 1% move
Suppose a position with a notional value of 10,000 USD and leverage of 1:20 (a theoretical example, not any provider's real terms). Margin is 10,000 ÷ 20 = 500 USD. If price moves 1%, the result is 10,000 × 0.01 = 100 USD, which is 100 ÷ 500 = 20% of the margin, in your favour or against you. The higher the leverage, the greater the weight of a small move on the capital deposited.
Illustrative example: the effect of the spread
If an instrument quotes a bid of 100.00 and an ask of 100.10, the spread is 0.10 per unit. With 100 units, opening and immediately closing costs roughly 100 × 0.10 = 10 in the contract currency, before commission and swap. These numbers are an exercise, not real quotes.
Main risks
- Magnified losses because of leverage.
- Forced closing if available margin falls below the required level (margin call or stop-out).
- Accumulated costs from spread, commission and swap.
- Counterparty risk: you trade against the provider, so check its authorisation and regulation.
- Price gaps around events on the economic calendar, which can make a stop harder to execute at the intended price.
CFD vs buying the asset
| Aspect | CFD | Underlying asset |
|---|---|---|
| Ownership | You do not own the asset | You own it |
| Direction | Allows long or short positions | Usually long |
| Initial capital | Partial margin | Full value |
| Ongoing costs | Spread, swap, commission | Purchase and custody fees |
| Risk of loss | Can be high because of leverage | Limited to the capital invested in the asset |
How AIM helps
AIM is AIMPATFX's quantitative artificial intelligence. AIM Risk calculates the mathematical position size from the risk the user chooses and the contract specifications; AIM Market organises bias, scenarios, invalidation and targets conditional on the data provided. It does not issue orders or guarantee results. Read the quantitative methodology and the guide on risk management. The decision and the risk are the user's.
Frequently asked questions
What does CFD stand for?
Contract for difference: the price difference between opening and closing is settled.
Do I own the asset if I open a CFD?
No. You hold a contract with the provider, with no shareholder rights or physical ownership.
Can I lose more than my deposit?
It depends on the jurisdiction and the provider; some terms limit the loss to the account balance and others do not. Check the terms before trading.
What is the difference between margin and leverage?
Margin is the collateral held; leverage is the ratio between the position's value and that margin.
Are CFDs suitable for everyone?
No. They are complex products; understand the costs and practise first on a demo account.
Sources and review: conceptual content with no market figures, reviewed on 15 October 2026; for specific conditions consult the provider's disclosure document and your national regulator. Educational content; CFDs carry a risk of loss.
