What Is a CFD?

CFDs in One Sentence

A Contract for Difference is an agreement between you and your broker: when you close the position, whoever benefited from the price move pays the other the difference. If you bought gold and the price rose, the broker pays you the difference. If it fell, you pay the broker. No physical asset changes hands at any point.

This structure gives CFDs two properties that make them the default instrument for most UK retail traders. First, you can profit from falling prices as easily as rising ones, by opening a short position rather than a long one. Second, you can access a large range of markets, from currency pairs to individual shares to commodity futures, through a single account with a single broker.

The name is deliberately dry. What it describes is simple: a contract settled on the difference in price between two moments in time.

A Worked Example

The mechanics become clear with a specific example. Gold is trading at £1,800 per ounce. You believe the price will rise, so you open a long CFD position for five units.

Your gross exposure is £9,000. Your broker requires a margin deposit to hold this position. The margin requirement depends on the asset and your broker, but for this example, assume 5% of the total position value: you deposit £450 to control £9,000 of exposure.

The important observation: a £250 profit or £200 loss was generated from a £450 deposit. That is the effect of leverage. The percentage change in the margin is far larger than the percentage change in the price of gold itself.

What You Can Actually Trade as a CFD

CFDs are available on most instruments a retail trader would encounter. Forex pairs are the most common: GBP/USD, EUR/USD, and other major, minor, and exotic pairs all have CFD equivalents. Individual company shares from major exchanges, indices like the FTSE 100 and S&P 500, commodities including gold, oil, and natural gas, and cryptocurrency assets can all be accessed via CFD from a single broker account.

The underlying asset's normal market behaviour does not change because you are accessing it through a CFD. Gold moves the same way whether you trade it through a CFD, a futures contract, or a physical ETF. The CFD is a delivery mechanism, not a different kind of instrument.

Leverage and Margin in CFD Trading

Every CFD position uses leverage. You do not pay the full contract value to open a trade: you post margin, a percentage of the total exposure, and your broker provides the rest. This is what makes CFDs accessible with relatively small account sizes, and what makes them dangerous if position sizing is not managed carefully.

The FCA sets maximum leverage ratios for retail clients by asset class. For major currency pairs, the current limit is 30:1. For other instruments, lower limits apply. The What Is Leverage page covers this in full detail, with worked examples showing what different leverage ratios do to your margin at the same percentage price move.

CFD vs Spread Betting

Both products allow speculation on price direction without owning the underlying asset. Both use leverage. Both are available through FCA-regulated brokers. The distinction that matters most to UK retail traders is tax treatment.

For most UK retail traders who are below the capital gains tax annual allowance, the tax distinction is academic. For traders generating significant consistent profits, spread betting's tax-free status becomes materially significant. The blog post on spread betting tax in the UK covers this in detail.

The Real Risk

The FCA requires all CFD providers to publish the percentage of retail client accounts that lose money. Across the industry, the figures are high. This is a documented fact, stated clearly on every regulated provider's website, and it deserves to be understood rather than dismissed.

The losses are not primarily caused by CFDs as an instrument. They are caused by the combination of leverage and insufficient preparation. A trader who enters positions without a defined edge, without a stop loss, and without applying position sizing correctly will lose money in any leveraged instrument, regardless of whether it is called a CFD, a spread bet, or anything else.

Understanding what a CFD is, as this page covers, is the first step. Understanding how to use one responsibly — with a tested strategy, consistent risk management, and realistic expectations — is the work that follows. The Drawdown curriculum is structured to build that understanding progressively.