In plain English
What Contract for difference means
With a CFD, you are speculating on price movement in something else—such as a share, index, commodity, or currency pair—rather than buying the asset itself. If the price moves in your favor, the contract settles in cash; if it moves against you, you owe the difference. CFDs are typically traded over the counter and often use leverage, which can magnify gains and losses.
Why it matters
The key distinction is exposure without ownership. That affects financing costs, dividend treatment, execution, and the type of risks you face. It also means the pricing and obligations come from the contract terms and the broker’s venue or counterparty arrangements, not from owning the underlying instrument.
Example
Suppose a CFD tracks Company A shares. You open a long CFD when the quoted price is 100 and close it when it is 106. Ignoring fees, the contract settles the 6-point difference in cash. If you had opened short instead, the same move would produce a loss. This is simplified and excludes spreads, financing, and adjustments.
Quick answers
Common questions
Is a CFD an investment in the underlying asset?+
No. A CFD references the asset’s price, but you normally do not own the asset itself.
Are CFDs always leveraged?+
Usually, yes. The contract is commonly margined, but the exact leverage depends on the provider and applicable rules.
Sources