Market StructureContract for Difference
CFD (Contract for Difference)
A leveraged OTC contract to exchange the difference in an instrument's price between opening and closing, without owning it.
What CFD (Contract for Difference) means
A contract for difference is an agreement between a trader and a broker to settle the change in an instrument's price from open to close, in cash. No underlying asset is delivered, so a trader can go long or short with equal ease and access shares, indices, commodities and currencies from a single margined account. Positions are leveraged, and profit or loss is calculated on the full notional value rather than on the margin posted.
Because CFDs are over-the-counter, the broker is the counterparty and sets contract specifications, financing rates and trading hours. Holding costs accrue daily and can dominate returns on long-held positions, and leverage magnifies losses as readily as gains, which is why regulators cap retail leverage and require risk warnings. CFDs are prohibited for retail clients in some jurisdictions, notably the United States, so availability depends on where the trader is resident.
Worked example
Buying one lot of a EUR/USD CFD at 1.0850 and closing at 1.0880 realises 30 pips on 100,000 euros of notional, or about 300 US dollars before financing and commission.
Related terms
- Over-the-Counter (OTC)Trading conducted bilaterally between two counterparties rather than through a centralised exchange and clearing house.
- Spread BettingA UK and Ireland product where you stake an amount per point of price movement rather than trading a position size.
- LeverageThe ratio between the notional size of a position and the margin a trader must post to open and hold it.
- Overnight FinancingThe daily cost of carrying a leveraged position, applied to CFDs on indices, shares and commodities as well as forex.
- Leverage CapA regulatory ceiling on the leverage a broker may offer retail clients, varying widely between jurisdictions.
Frequently asked questions
What does CFD (Contract for Difference) mean in forex trading?
A leveraged OTC contract to exchange the difference in an instrument's price between opening and closing, without owning it.
How does CFD (Contract for Difference) work in practice?
Because CFDs are over-the-counter, the broker is the counterparty and sets contract specifications, financing rates and trading hours. Holding costs accrue daily and can dominate returns on long-held positions, and leverage magnifies losses as readily as gains, which is why regulators cap retail leverage and require risk warnings. CFDs are prohibited for retail clients in some jurisdictions, notably the United States, so availability depends on where the trader is resident.
What is an example of CFD (Contract for Difference)?
Buying one lot of a EUR/USD CFD at 1.0850 and closing at 1.0880 realises 30 pips on 100,000 euros of notional, or about 300 US dollars before financing and commission.
Trade with a regulated broker
Understanding the terminology is the cheap part. The expensive part is choosing a counterparty whose execution, financing and withdrawal behaviour match what the marketing implies. Every broker below has been reviewed with a funded live account, and each review states which legal entity and which regulator applies to the account you would actually open.
Check the licence on the regulator's own register before you deposit — our regulators directory explains what each authority enforces, from leverage caps to compensation limits.