A contract for difference (CFD) is an agreement between you and a broker to exchange the difference in the price of an asset between the time you open and close the contract. It lets you go long or short with leverage without owning the asset. Most retail forex, index and commodity trading in Europe happens through CFDs.
How a CFD trade works
You believe the Germany 40 index will rise and buy 2 CFDs at 24,000, on a contract worth €1 per point. The index rises to 24,150 and you close: 150 points × €2 = €300 profit, before costs. Had it fallen to 23,850, you would have lost €300.
Under ESMA rules the broker needs 5% initial margin for a major index (20:1 leverage): 24,000 × 2 × 5% = €2,400.
The costs
- Spread: the difference between the buy and sell price. It is the main cost for most CFD trades.
- Commission: common on share CFDs and raw-spread FX accounts.
- Overnight financing: holding a leveraged position overnight costs interest, typically a benchmark rate plus 2–3% a year on longs. Over months this adds up – try the overnight financing calculator.
- Currency conversion if the instrument is priced in another currency.
- Guaranteed stop premium if you use one.
The ESMA retail package
EU-licensed providers must apply, for retail clients: leverage caps from 30:1 to 2:1, a 50% margin close-out, negative balance protection, a ban on incentives and a standard risk warning with the percentage of losing accounts. They must also assess whether CFDs are appropriate for you before you trade, usually with a questionnaire.
CFD, share or ETF?
| You want to… | Usually better |
|---|---|
| Build long-term wealth | Real shares or ETFs – no financing costs, you own the asset. See ETF savings plans. |
| Trade short-term moves with leverage | CFDs (or futures for larger accounts) |
| Go short or hedge a portfolio | CFDs, futures or options |
| Trade in the UK or Ireland tax-efficiently | Possibly spread betting – see spread betting |
Counterparty risk
With a CFD your counterparty is the broker. If it fails, open positions are closed and your claim is the cash value. That is why the provider's licence, capital and client-money protections matter – check them in our broker register.
Frequently asked questions
Are CFDs legal in Europe?
Do I own the shares when I buy a share CFD?
This guide is general information, not personal financial, tax or legal advice. Rules change; we review this page regularly and show the date of the last update above. Found an error? Tell us. See our editorial policy.
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