What Is a CFD?

You get a contract, not shares

A CFD is an agreement between you and the provider: you don't buy the asset itself and you're not a shareholder; it just tracks the price.

Closing settles only the price difference

P&L = (exit price − entry price) × size. If it rises, the provider pays you the difference; if it falls, it comes out of your account. Opening only takes part of the money as margin, but P&L is calculated on the whole position.

One account, many markets

Indexes, forex, gold and oil, and individual stocks can all be traded as CFDs. The price: you bear costs like the spread and overnight financing, plus counterparty risk on the provider itself, so choosing a regulated provider matters.

Key takeaways

• A CFD (contract for difference) trades only the price difference. You don't own the underlying asset and you aren't a shareholder.
• Long P&L = (closing price − opening price) × quantity. P&L is calculated on the full position, not on the margin.
• CFDs let you trade stocks, indexes, commodities, forex and more, while carrying the spread, financing fees and counterparty risk with the platform.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Click "Example: 10 units · $200 → $210" and check whether both lanes end with a P&L of +$100.
2. Compare "the money you put up" on each side: buying the stock takes $2,000. How much margin does the CFD need?
3. Drag the exit price to $190 and play again: for the same −$100, what percentage of the margin did you lose?
4. Pause on the "open" step and see what's been added to each account.

Quiz and explanations

1. You go long 10 units of a stock CFD, opening at $200 and closing at $210. What's your P&L?

Answer: +$100.$10 × 10 units = $100.

2. If you hold a stock CFD, are you a shareholder of the company?

Answer: No, only the price difference is settled.A CFD is a contract between you and the platform.

3. You go long 50 units of a $200 CFD at 10:1 leverage, and the price falls to $190. How much do you lose?

Answer: $500.P&L is based on the full position: $10 × 50 units = $500, regardless of the leverage used.

Terms in this lesson

• CFD: A contract with a broker to settle the price difference between opening and closing, without owning the underlying asset.
• counterparty risk (Counterparty Risk): The risk that the other side or the platform defaults or goes bust, so the deal can't be honored.
• margin (Margin): The deposit set aside when you open a position = position value ÷ leverage.
• overnight financing (Overnight Financing): A fee charged (or paid) at the financing rate for holding a leveraged position overnight, also called a swap fee.
• shareholder (Shareholder): Someone who owns a company's stock and shares in its growth and dividends in proportion to their stake.
• spread (Spread): The gap between the Ask and the Bid, a hidden cost on every trade.