What is a contract for difference?
A contract for difference (CFD) is an agreement between you and a broker to exchange the difference in an asset's price between the moment the contract opens and the moment it closes. If the price rises and you are long, the broker pays you the difference. If it falls, you pay the broker.
Structurally, it is a small, retail-facing total return swap — the same instrument you met in Unit 2, in consumer packaging.
What you do and do not get
- You never own the underlying. No shares are registered to you. No voting rights. No shareholder communications. No transfer, no delivery, no settlement in the underlying market.
- Your position exists only in the broker's books. There is no exchange, no order book you're trading on, no central clearing house standing behind the contract.
- The broker is your counterparty. Not a venue, not an intermediary matching you against another investor — the other side of your contract. Unit 4 examines that relationship in detail, because it is the single most important structural fact about the product.
- You post margin, not the purchase price. A fraction of the position's value is deposited. The rest is exposure, and it carries a running financing cost (two lessons from here).
What CFD users are typically after
Two things, honestly stated: leverage — exposure much larger than the cash committed — and access, since a single account can quote positions on equities, indices, commodities and currencies across many markets, long or short, without the operational steps of each underlying market.
Both come with costs and structural features that the next three lessons quantify. This course does not suggest that anyone use a CFD; it explains exactly what the contract does, so that the arithmetic is visible rather than assumed.
What is missing compared with owning the asset
| Owning shares | CFD | |
|---|---|---|
| Legal ownership | Yes | No |
| Voting rights | Yes | No |
| Counterparty | The market, then a clearing house | The broker |
| Holding cost | None (you own it) | Financing charged daily |
| Can hold indefinitely | Yes | Only while margin is maintained |
| Downside | Limited to what you paid | Can exceed the deposit |
That last row is the one to sit with. An unlevered shareholder's worst case is the money spent. A CFD holder's loss is calculated on the full notional, and the deposit is not a ceiling on it — it's a buffer. Whether it can go below zero depends on jurisdiction and broker terms, which Unit 4 covers.
Availability differs sharply by country
CFDs are not available to retail clients in the United States. Elsewhere the treatment varies widely — permitted with strict leverage caps and mandated disclosures in the UK and EU, restricted in Australia, banned or curtailed in several other jurisdictions. That variation is itself information, and Unit 4 explains what regulators observed to produce it.
Try it now
- Twelve months of a liquid stock is below. Drop a Level at today's price, then find the year's high and its low and read both.
- Write out what a $10,000 unlevered purchase made at today's price would have been worth at that low. Then write what a $10,000 margin deposit on a 5:1 CFD position would represent in notional (hint: $50,000) and what the same low would have done to it. Measure from your Level down to the low to get the percentage once and use it twice.
- List the two things you would lose by holding the CFD instead of the shares. If "the dividend" was on your list, hold that thought — the answer is more interesting than it looks.