Who it's for — Anyone who sees the name of a stock, index, commodity or currency on a broker platform and needs to understand whether they hold the underlying or a claim or liability against the provider.
A CFD is a derivative contract that provides long or short exposure to a change in the price, level or value of an underlying and settles as a cash difference under the provider's terms. The client does not thereby receive the stock, index or commodity named in the contract.
In plain terms — The underlying's name describes the price reference, not what you own. The actual right is the CFD.
CFD, spot and futures
| Dimension | CFD | Spot | Future |
|---|---|---|---|
| Right held | contract against the provider | depends on the asset and settlement | standardized contract |
| Underlying | is not conferred on the client | may be delivered or recorded under the relevant structure | is not necessarily delivered |
| Market relationship | normally OTC with the provider | exchange or OTC | organized venue and clearing |
| Term | the provider's terms, close-out and rollover | spot settlement | contractual expiry |
| Margin | generally required | depends on the instrument and account | performance bond |
| Price | the provider's methodology and spread | venue or dealer price | contract and expiry price |
Calling a product “spot” is not enough to establish ownership; calling it a “CFD” does establish that the client holds a contract for difference rather than the underlying.
How the result is calculated
In simplified form, before currency conversion and other adjustments:
gross P&L = direction × quantity × (closing price − opening price)
net P&L = gross P&L − spread − commissions − financing − other costs
The multiplier, currency, corporate actions, synthetic dividends, stop-out and pricing method depend on the contract. A CFD chart may follow the underlying without being identical to the cash or futures price.
Margin, leverage and close-out
Margin enables notional exposure greater than the capital committed and amplifies gains and losses. Requirements, negative balance protection, close-out rules and leverage limits depend on the jurisdiction and client classification. EU or UK retail protections should not be generalized to offshore providers or professional clients.
Before opening a position, check:
- the provider's legal entity and supervisory authority;
- the pricing methodology, spread and possibility of requotes or slippage;
- initial margin, maintenance margin, stop-out and liquidation;
- overnight financing and treatment of non-business days;
- corporate actions, synthetic dividends and currency conversion;
- handling of client money and the consequences of insolvency.
Distinctive risks
- counterparty — the claim depends on the provider's performance;
- leverage — a limited price change can quickly consume margin;
- pricing and execution — spreads and conditions are those of the contract;
- financing — costs can accumulate on positions held open;
- liquidation — the provider can close positions under its thresholds;
- regulatory scope — protections and prohibitions vary by country and client.
Sources
- European Securities and Markets Authority, Additional information on the agreed product intervention measures relating to contracts for differences and binary options — CFD definition, cash settlement and retail risks.
- Financial Conduct Authority, Contract for differences, updated 13 June 2025 — leverage, close-out, protections and conflicts within the UK framework.
- Financial Conduct Authority, Multi-firm review of CFD providers' provision of price and value, 13 November 2025 — spreads, commissions, overnight funding and pricing by OTC providers.
- European Securities and Markets Authority, MiFID II, Annex I — Lists of services and activities and financial instruments — derivative categories within the EU framework.