Education · Guide
What is a CFD? A beginner’s guide
A plain-English guide to contracts for difference: how they work, what they cost and what can go wrong.
What is a CFD?
A CFD, or contract for difference, is an agreement to exchange the difference in an asset's price between the time you open a trade and the time you close it. You never own the asset. You trade on whether its price will go up or down, and your profit or loss is the price change multiplied by your position size.
CFDs exist for many markets: currencies, gold, stock indices, oil, shares and cryptocurrencies. That is why one account can give access to all of them. If you want the product details on our side, see CFD trading with AQ Markets.
How does a CFD work?
A CFD tracks the price of an underlying asset. You pick a market, choose a size and decide whether to buy or sell. When you close, the difference between your opening and closing price, times your size, is settled in cash in your account.
Hypothetical example: A share CFD is priced at $50.00. You buy 100 units, a position worth $5,000. The price rises to $53.00 and you close. The gain is $3.00 × 100 = $300, before costs. If the price had fallen to $47.00, the loss would be $300, plus costs.
Prices on the platform follow the market for the underlying asset. Because you trade a contract and not the asset itself, there is no delivery, no share certificate and no wallet to manage.
What does going long or short mean?
Going long means buying a CFD because you expect the price to rise. Going short means selling a CFD because you expect it to fall. Both positions can be opened as easily as each other.
A long position gains when the price rises and loses when it falls. A short position does the reverse. Short positions lose when the price rises, just as long positions lose when it falls.
How does margin work with CFDs?
CFDs are traded on margin. You put up a fraction of the position's full value as a deposit, and that deposit is called margin. For example, 10% margin on a $4,000 position means $400 is set aside while the trade is open.
This is leverage: your exposure is larger than your deposit, so your gains and losses are too. If losses use up too much of your equity, you may face a margin call, and positions can be closed automatically at a stop-out level. Our leverage guide explains both, and the margin calculator shows the numbers for a given trade.
What does it cost to trade CFDs?
CFD costs usually come from the spread, commission, overnight financing and sometimes other fees. The mix depends on the market and the account. Read the account terms and the instrument specification before you trade.
| Cost | What it is | When you pay it |
|---|---|---|
| Spread | The gap between the buy (ask) and sell (bid) price | When you open a trade: you buy at the ask and could sell only at the bid |
| Commission | A fee charged on some accounts or markets, such as share CFDs | When you open and, in some cases, close |
| Overnight financing (swap) | A charge or credit for holding a leveraged position past the daily cut-off | For each night the position stays open |
| Slippage | A fill price that differs from the price you saw | In fast or thin markets |
| Currency conversion | A cost when the market's currency differs from your account currency | When profit or loss is converted |
Because financing builds up over time, CFDs are generally used for shorter holding periods than owning the asset outright. See the trading conditions page for current terms.
How is a CFD different from owning the asset?
With a CFD you trade the price move only, while owning the asset gives you the asset itself. Buying a share gives you shares, and usually voting rights and dividends. Buying a share CFD gives you exposure to the price and not the company.
| CFD | Owning the asset | |
|---|---|---|
| What you get | A contract that tracks the price | The asset itself |
| Capital needed | Margin, a fraction of the position | Usually the full price |
| Direction | Long or short | Mainly long |
| Ongoing costs | Spread, financing, possible commission | Dealing fees, possibly custody costs |
| Dividends and voting | Dividend adjustments may apply; no voting rights | Dividends and voting rights belong to you |
| Loss potential | Can exceed your deposit | Normally limited to the amount invested |
How is a CFD different from a futures contract?
Both let you trade price moves with leverage, but futures are standardised contracts traded on an exchange with a fixed expiry date. A CFD is a contract between you and your broker, usually has no fixed expiry, and can be sized more flexibly.
Futures contract sizes are set by the exchange and can be large. Many CFDs can be traded in smaller sizes. Futures expire on a set date. To keep the exposure, you close the position and open one in the next contract month. Most CFDs have no expiry and charge overnight financing instead, though some CFDs based on futures, often oil, do expire.
What are the risks of CFDs?
The main risk of CFD trading is that leverage magnifies losses, and you can lose more than you deposit. Prices can move quickly and gap past your stop-loss, so a loss can be larger than you planned.
- ✓ Leverage risk. A small price move can produce a large loss relative to your margin.
- ✓ Market risk. Prices move on news, data and sentiment, sometimes sharply.
- ✓ Gap and slippage risk. Orders can fill at worse prices than expected.
- ✓ Cost risk. Spreads and overnight charges reduce returns, especially on long holds.
- ✓ Counterparty risk. Your contract is with your broker. If the broker cannot pay, you may not get your money back. Read our regulatory status page before you rely on any protection.
Read the full Risk Disclosure before trading.
Who might CFD trading suit?
CFDs may suit people who understand leverage, accept that they can lose more than they deposit, and have time to watch positions closely. They are not suitable for everyone, and many retail accounts lose money. They are not a way to save or invest for the long term.
If you are new, start with a demo account and learn the basics first. Our guide to forex trading for beginners and the glossary are good places to begin.
Which markets can you trade as CFDs?
Each market has its own pricing, hours and drivers. Browse the ones you want to learn about.
- ✓ Forex CFDs: currency pairs such as EUR/USD.
- ✓ Metals CFDs: gold, silver and other metals.
- ✓ Index CFDs: baskets of shares from major markets.
- ✓ Commodity CFDs: agricultural and other raw materials.
- ✓ Energy CFDs: crude oil and natural gas.
- ✓ Share CFDs: individual company shares.
- ✓ Crypto CFDs: price exposure to cryptocurrencies.
Risk note. CFDs are leveraged products. Prices can move quickly against you, and losses can exceed your deposit. This guide is general education, not personal advice. Read the Risk Disclosure before you trade.
Sources
Sources
Official references behind the facts in this guide. They are outside sites that we do not control.
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