Trading conceptsUpdated 2 min readBy the FXNOD team
What are CFDs and how do they work?
A CFD, or contract for difference, is an agreement with a broker to exchange the difference in a market's price between when you open the contract and when you close it. You never own the underlying asset. CFDs are leveraged, so a small deposit controls a large position, and losses as well as gains are magnified.
How one works
Choose a market and a direction
Buy if you expect a rise, sell if you expect a fall.
Choose a size
In lots or units. This decides how much each point is worth.
Put up margin
A fraction of the position's value.
Close when you choose
The difference in price, times the size, is your profit or loss.
A worked example
You buy a CFD on an index at 5,000, with a size that pays 1 per point. The index rises to 5,050 and you close: a profit of 50, less costs. Had it fallen to 4,950 you would have lost 50. The margin you put up may have been only a few units, which is why a move of 1% can be a large share of the deposit.
The costs
| Cost | When |
|---|---|
| Spread | On every trade, at the open |
| Commission | On some accounts and markets |
| Overnight financing (swap) | Each night a position is held |
| Slippage | When fills differ from the quoted price |
Why regulators warn about them
- Leverage turns ordinary price moves into large gains and losses.
- Brokers in regulated markets must publish the share of retail accounts that lose money on CFDs, and it is a clear majority.
- The broker is often the other side of the trade.
- Retail CFDs are restricted or prohibited in some countries.
CFDs against other products
| CFD | Fixed-payout option | Owning the asset | |
|---|---|---|---|
| Ownership | None | None | Yes |
| Leverage | Yes | No | No, unless borrowed |
| Loss per trade | Open-ended without a stop | The stake | The amount invested |
| Can go short | Yes | Yes | Only by borrowing |
Who should avoid them
Anyone who does not yet understand margin, leverage and position sizing. Learn those on a demo account first. Deriv offers CFDs on Deriv MT5 and Deriv cTrader and warns of losing money rapidly due to leverage. FXNOD's tools do not trade CFDs.
Questions people ask
- Do you own the asset with a CFD?
- No. A CFD is a contract on the price. You have no ownership, voting rights or delivery.
- Are CFDs good for beginners?
- They are high risk and need an understanding of leverage first. Most retail CFD accounts lose money.
- What is the difference between CFDs and futures?
- Futures are standardised contracts traded on an exchange with an expiry. CFDs are agreements with a broker, usually without expiry.
Try it without risking money
Connect your Deriv demo account to FXNOD and place the trade you just read about with virtual funds. Check the available tool packages in Discover.
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