How CFDs Work: Contracts, Not Ownership — and What That Changes

Most trading platforms aimed at retail clients — including this one — do not sell you currencies, shares, or barrels of oil. They sell you a contract about their prices. That contract, the ▲contract for difference, is the product underneath nearly everything on this site, and its mechanics decide what you can do, what it costs, and what can go wrong. This sheet explains the instrument plainly — including the cases where it is the wrong tool for what you actually want.

The contract in one sentence

A CFD is an agreement to exchange the difference between the price at which you open a position and the price at which you close it. That is the entire product. Close higher than you opened a buy, and the other party to the contract — your broker — credits the difference to your account. Close lower, and your account is debited by the same arithmetic. No currency changes hands at the start, nothing is delivered at the end; until you close it, the position exists only as an open contract with a running, unrealized difference.

EUR/USD at $10 per pip on one standard lot is this survey's standard worked example, and it shows the contract's defining property in a single line: the gain case and the loss case are the same formula with the sign flipped. At no point did you hold euros. You held a claim on a price difference — and the difference goes negative exactly as easily as it goes positive.

Two practical consequences follow. First, nothing is realized until you close: the running number on an open position is an offer, not an outcome, and it changes every tick. Second, because the contract is with the broker rather than traded on an exchange, the prices you deal at are the broker's quotes — built from the wider market, published with a spread, and worth auditing occasionally against an independent feed. A later sheet in this survey covers where those quotes come from.

No ownership: what you give up, what you get instead

Buy a share through a stockbroker and your name connects to a register entry: you own a slice of the company, can vote at its meetings, and receive its dividends. A share CFD gives you none of that. You are not on any register, and there is nothing to deliver, store, or transfer, because you never touch the ▲underlying asset. The same holds across the range: a gold CFD involves no metal, an index CFD no basket of shares, a crypto CFD no wallet and no keys.

Some of ownership's cash flows are imitated. Hold a share or index CFD long over a dividend date and your account receives a dividend adjustment of roughly the dividend's size; hold it short and your account pays it. But an adjustment is not a dividend — it arrives without shareholder rights attached, and its tax treatment can differ from real dividend income depending on your jurisdiction. The imitation is close enough to look identical on a statement and different enough to matter when you plan around it.

What the contract gives you instead is reach and flexibility: cash settlement in your account currency, positions opened with a margin deposit rather than full payment, and a sell button that works exactly like the buy button. The honest framing of the trade-off is this: ownership converts your money into an asset that exists independently of whoever sold it to you; a CFD converts your money into a claim on a regulated firm. That is why regulation, segregated client funds, and published disclosures are not fine print on this product — they are the ground the product stands on.

Going long and going short with equal ease

▲Going long means buying first and profiting if the price rises. ▲Going short means selling first — selling something you never owned — and profiting if the price falls. With real assets, shorting is awkward: shares must be located and borrowed before they can be sold, and many retail accounts cannot do it at all. With a CFD there is nothing to borrow, because there is nothing to deliver. The sell ticket opens a short contract precisely as the buy ticket opens a long one.

The arithmetic mirrors perfectly. Sell 1 lot EUR/USD at 1.0850 and a fall to 1.0810 pays +$400, while a rise to 1.0890 costs −$400 — the same dollars per pip as the long trade, with only the direction of the bet flipped. Symmetry is the rule everywhere in this product: any mechanic that can pay you is the same mechanic that can charge you.

Shorting carries its own bills, plus one asymmetry worth respecting. Short share and index CFDs pay the dividend adjustment rather than receive it, overnight financing applies in both directions, and borrow-related charges can appear on hard-to-short stocks. The asymmetry: a falling price stops at zero, but a rising one has no ceiling — a short position's worst case is structurally worse than a long one's, which is one more reason exits are decided before entry, not after.

One wrapper, many markets

Because the contract references nothing but a price, it can reference any price. The account that trades EUR/USD can take a position on an equity index, an ounce of gold, a single company, or a cryptocurrency — same order tickets, same margin pool, same statement at the end of the month.

• Index CFDs — a whole equity basket, such as the US 500 or Germany 40, held as one position; dividend adjustments pass through, and pricing follows the related futures.
• Commodity CFDs — gold, oil, gas with no storage and no delivery; the futures they track expire, so longer holds see periodic rollover adjustments.
• Share CFDs — single companies, usually with a commission charged per trade and borrow-related costs on the short side.
• Crypto CFDs — crypto price exposure without wallets or exchanges; the underlying's volatility combined with leverage makes this the sharpest edge in the list.

Convenience cuts both ways. One interface makes it exactly as easy to open a position in a market you have never studied as in one you know well — and the margin standing behind both comes from the same pool. Multi-market reach is a genuine advantage of the wrapper; undifferentiated confidence across markets is a reliable way to lose money in several of them at once.

What the wrapper itself costs

Nothing above is free, and the bill has a fixed shape: a spread paid on entry, a commission on some instruments, and overnight financing for every night a position stays open. On the standard example — 1 lot EUR/USD, a 0.8-pip spread, three nights held at an illustrative $5.40 per night — the all-in cost is about $8 + $16.20 ≈ $24 before the trade has gone anywhere. The full line-by-line breakdown has its own sheet in this survey, but one property belongs here: costs are direction-blind. They reduce the winning trade and deepen the losing one by the same amount, which is why they are computed before the position, not discovered after it.

Two more line items appear on specific instruments: share CFDs usually carry a commission per side, and any position whose profit is measured in a currency other than your account's pays a small conversion fee on the way back. None of these numbers is hidden — each sits in a published schedule, which means each can be checked before the trade instead of regretted after it.

The honest trade-off table: CFD vs owning the asset

When not to use a CFD

The financing line settles the long-term question on its own. Overnight financing is charged on the whole position — not just on your margin — typically at a reference interest rate plus the broker's markup. Illustrative arithmetic: a $20,000 share-CFD position financed at 8% a year costs about $4.40 every night, which compounds to roughly $1,600 over a year. An investor who bought the shares outright pays nothing comparable, and collects real dividends while holding. Held long enough, the wrapper's nightly rent exceeds any advantage it ever offered.

So, the plain statement, from a firm that sells the product: CFDs are not suitable for long-term buy-and-hold investing. They are also the wrong choice when what you actually want is ownership — real dividends, voting rights, an asset that exists independently of any broker — or when leverage is a feature you would have to fight rather than use. There is no version of this paragraph in which the product fits everyone; a broker that claims otherwise is describing its revenue, not your interests.

A usable rule of thumb: write down how long you expect to hold, multiply the nightly financing by that number, and compare the result with what you realistically expect the trade to make. When the first number is a meaningful fraction of the second, the wrapper is working against the idea — either the holding period shrinks, or the instrument changes. The arithmetic takes one minute and replaces a month of vague discomfort.

What the contract is built for: positions over days to weeks, in either direction, across many markets, opened with limited capital and managed with explicit risk controls — deliberate sizing, a stop-loss, and a holding period you chose on purpose. Inside that frame, the CFD is a precise instrument. Outside it, the costs and the leverage stop being features and start being the reason the account shrinks.