Short answer: A CFD (contract for difference) is a contract with your broker that pays out the change in an asset’s price. You never own the share, gold or currency itself. That lets you go short and use leverage, but you pay overnight fees and you take on the broker as your counterparty.
How a CFD works
You and the broker agree to swap the difference between the price when you open the trade and the price when you close it. Buy a CFD on gold at $2,400, close at $2,450, and the broker pays you the $50 difference for each ounce your position covers. If gold falls instead, you pay the broker.
CFD vs buying the asset
| Buying the asset | Trading a CFD | |
|---|---|---|
| What you own | The share, coin or bar itself | A contract with your broker |
| Going short | Hard or impossible | As easy as going long |
| Leverage | Usually none | Yes, up to 1:30 for retail in the UK, EU and Australia |
| Holding costs | Custody or platform fees | An overnight fee (swap) on most positions |
| Dividends and voting | Yes | Dividend adjustments, no voting rights |
| Who you depend on | The exchange and your custodian | The broker that issued the contract |
Why leverage changes everything
Leverage means a small deposit controls a much bigger position. A 1% move in the price becomes a 30% move in the money you put up at 1:30. It works both ways, which is why most retail CFD accounts lose money. Our Learn guide walks through one leveraged trade with real numbers.
When a CFD makes sense, and when it doesn’t
- It can suit short-term trades, going short, or trading markets you can’t easily buy, like indices.
- It rarely suits long-term investing. Overnight fees add up, and you don’t own anything at the end.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Most retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
