How it works
The trader opens a CFD position with the broker by posting margin (typically 5 to 20 percent of notional for stocks, 0.5 to 5 percent for FX). The broker quotes a bid and ask price tracking the underlying. P&L accrues in real time on the notional difference. To close, the trader takes the opposite-side trade. The position settles in cash; no shares or commodities change hands. Overnight financing applies for positions held past the daily cutoff.
Example
A trader opens a long CFD on Apple at $180 for 100-share notional ($18,000), posting 10 percent margin ($1,800). Apple rises to $185. P&L = (185 − 180) × 100 = +$500, a 27 percent return on margin from a 2.8 percent move in the underlying. Apple falls to $175 instead: P&L = (175 − 180) × 100 = −$500, a 27 percent loss on margin. The same leverage applies to short positions, which a stock account would require borrow to replicate.
Why it matters
CFDs offer flexibility cash equities lack: leverage, short-selling with no borrow setup, exposure to indices and commodities without owning futures, fractional notional sizing. The trade-offs: spreads are wider than direct market access, overnight financing erodes long positions, and the broker is the counterparty (counterparty risk matters in stressed markets). CFDs are not available to US residents under SEC rules; in the UK, EU, and most of the world they are a primary tool for active retail traders.
