Ways to trade and invest · Guide 8 of 11

What Is CFD Trading? Contracts for Difference Explained

Last reviewed 2 November 2026Advanced: uses leverage or contractsCovers the UK, US, EU, Australia and Canada

The short version

A CFD, or contract for difference, is an agreement between you and a provider to swap the difference in an asset’s price between when you open and close the trade. You never own the shares, currency or commodity. You just gain or lose the price change, multiplied by the size of your position. CFDs are leveraged, so a small deposit controls a large position, and that’s why they’re one of the riskiest products sold to the public.

You get: A contract with a provider, not the asset itself
Typical costs: Spreads, commissions, daily financing on positions held overnight
Can you lose more than you put in?: Yes, except where negative balance protection applies (UK, EU, Australia retail)
Risk: Very high

You can trade CFDs on shares, indices, currencies, commodities and more, and you can bet on prices falling as easily as rising.
You only put down a fraction of the position’s value, called margin. Gains and losses are on the full value.
Because of leverage, a fairly normal price move can wipe out your deposit.
Your losses can be bigger than the margin you put down for a trade. Whether they can exceed your whole account depends on where you live and your account type.
CFDs aren’t available to retail traders in the US.

How a CFD works

Say a company’s shares cost £10. Instead of buying 1,000 shares for £10,000, you open a CFD with a provider to “buy” 1,000 shares’ worth. The provider asks you to put down margin, a deposit of a set percentage. For individual shares in the UK, the minimum margin for retail clients is 20%, which is 5:1 leverage¹.

From then on, every penny the share price moves is worth £10 to you (1,000 × 1p), up or down. When you close the trade, you and the provider settle the difference. You never receive the shares, dividends or voting rights, though the provider usually adjusts your account for dividends.

You can also sell first, called going short, to profit if the price falls. This is something you can’t easily do by buying shares in the normal way, and it’s part of why CFDs appeal to traders.

Example

A worked example

You buy a CFD on 1,000 shares at £10. Position value: £10,000. Margin at 20%: £2,000. You have £3,000 in the account.

The price rises 10% to £11. You make £1,000, a 50% return on your £2,000 margin.

The price falls 10% to £9. You lose £1,000, half your margin, from a single ordinary move.

Bad results come out overnight and the shares open 30% lower at £7. You lose £3,000. That’s more than the £2,000 margin you put down, and it’s your entire account. A stop loss at £9.50 wouldn’t have helped, because the price jumped straight past it (this is called a gap).

If you’re a retail client in the UK, EU or Australia, negative balance protection means your account stops at zero. Without that protection, for example on a professional account or with many offshore providers, a bigger gap would leave you owing the provider money.

What it costs

Spread: the gap between the buy and sell price, built into every trade.
Commission: charged on share CFDs by many providers, as a percentage of the position.
Overnight financing: holding a position overnight costs interest on the full position value, which is much bigger than your margin. On a £10,000 position at, say, 7% a year, that’s nearly £2 a day, or about £700 a year. This makes CFDs expensive for holding long-term.
Guaranteed stop fees: some providers offer a stop loss that is guaranteed even if the price gaps, for an extra charge.

The risks

Leverage. At 5:1, a 20% move wipes out your margin. At 30:1 (major currencies), a 3.3% move does.
Margin calls and automatic close-out. If your losses eat into your account, the provider asks for more money or closes your positions. In the UK and EU, providers must close positions once your funds fall to 50% of the margin needed². This can lock in losses just before a price recovers.
Gaps. Prices can jump past stop losses overnight, at weekends or on big news.
Costs over time. Financing charges add up the longer you hold.
Your opponent is often the provider. Many CFD providers take the other side of clients’ trades. They are still regulated and must treat you fairly, but the arrangement is worth understanding.

Regulators have found that most retail CFD traders lose money. UK and EU providers must show the percentage of their own retail accounts that lose money, and it’s usually well over half. In Australia, retail CFD clients lost more than A$458 million over a recent 12-month period, including A$73 million in fees³.

Rules where you live

Products, protections and tax rules differ from country to country. Here’s a summary for the main English-speaking markets. Always check your own regulator for the latest position.

UK: FCA rules for retail clients (in force since 2019) cap leverage at 30:1 for major currency pairs, 20:1 for other currencies, gold and major indices, 10:1 for other commodities and minor indices, 5:1 for individual shares and 2:1 for crypto. There must be 50% margin close-out, negative balance protection and a standard risk warning showing the share of accounts that lose money²⁴. CFDs on crypto are banned for retail clients.
US: CFDs aren’t allowed for retail traders. US residents can trade some similar exposures through regulated futures and options instead.
EU: The same leverage limits, close-out and negative balance protection apply across the EU, set by ESMA and adopted by each country’s regulator. Some countries add their own restrictions.
Australia: ASIC’s rules have applied since March 2021, with similar leverage limits (including 2:1 on crypto), margin close-out and negative balance protection. ASIC proposed in October 2026 to extend and tighten them until 2037³⁵.
Canada: CFDs are offered by some CIRO-registered dealers, with rules that vary between provinces. Check that a provider is registered where you live.
Elsewhere: Many CFD brokers are regulated offshore and advertise leverage of 100:1 or more, with little protection. If you’re in a country with strong rules, a broker offering much more leverage than allowed is a red flag.

Who it tends to suit

Tends to suit

Experienced, well-funded traders who use strict position sizing and understand margin.
Traders who want to go short or hedge positions for short periods.

Think twice if

Beginners. Learn to invest and trade without leverage first.
Long-term investing: the financing charges make it expensive.
Anyone who would be in real trouble if they lost the whole account.

How to get started safely

Work through our lessons on position sizing, stop losses and risk first.
Use a demo account for weeks before any real money, and track your results honestly.
Choose a provider authorised in your country, and stay a retail client so you keep negative balance protection.
Work out the full position value of every trade as well as the margin, and limit the risk per trade to a small part of your account.
Read the provider’s percentage of losing accounts before you deposit.

Words in this guide

CFD (contract for difference): A contract to exchange the change in an asset’s price, without owning the asset.
Margin: The deposit needed to open and keep a leveraged position, a percentage of its full value.
Leverage: Controlling a position bigger than your deposit. 5:1 means £1 of margin controls £5 of position.
Margin call / close-out: A demand for more money, or automatic closing of your positions, when losses use up your margin.
Gap: A sudden jump in price with no trading in between, which can skip past a stop loss.
Overnight financing: Interest charged on the full value of a leveraged position held overnight.
Negative balance protection: A rule that stops a retail account going below zero.
Retail vs professional client: Retail clients get the full set of protections. Professional clients can get higher leverage but lose most protections.

Frequently asked questions

Can you lose more than you invest with CFDs?

You can lose more than the margin you put down for a trade. In the UK, EU and Australia, retail accounts have negative balance protection, so you can’t lose more than the money in your account. Professional clients and customers of some offshore providers can end up owing money.

Why do most CFD traders lose money?

Leverage makes normal price moves large relative to your deposit, costs are charged on the full position, and automatic close-outs lock in losses. Most retail traders also take positions that are too big for their account.

Are CFDs legal in the US?

No, not for retail traders. US residents can access similar exposure through regulated futures and options markets.

Sources and further reading

Numbers in the guide, like ¹, point to these sources. Rules, fees and tax change, so check the latest version before you act.

Leverage and margin limits in the UK. BrokerChooser.
FCA confirms permanent restrictions on the sale of CFDs and CFD-like options to retail consumers (July 2019) Financial Conduct Authority.
ASIC moves to extend and strengthen CFD consumer protections (26-239MR, 12 October 2026) Australian Securities and Investments Commission.
PS19/18: Restricting contract for difference products sold to retail clients. Financial Conduct Authority.
Contracts for difference (CFDs) Moneysmart (ASIC).