CFDs and forex: what to understand before you open a trading account

A contract for difference (CFD) lets you take a position on the price movement of an asset without owning the asset itself. You agree to exchange the difference in price between the moment the position is opened and the moment it is closed. That single sentence is the whole product, and most of what goes wrong with it follows from what the sentence leaves out.

What you are actually agreeing to

Because you never own the underlying instrument, a CFD account is not a savings product and not a passive investment. It is active trading. Positions can be taken in either direction, which is genuine flexibility — but it also means there is no version of the position that simply sits there quietly and recovers over a decade. A CFD accrues costs while it is open, and it can be closed out for you if the margin behind it runs out.

What leverage does to a position

Leverage means putting up a fraction of a position's value as margin and carrying exposure to the rest. It is usually described in terms of what it does to gains. The arithmetic is symmetrical, and it is worth stating in the other direction: at 30:1, a move of roughly 3.3 per cent against the position wipes out the whole margin behind it. At 500:1 — available in some jurisdictions and not others — a move of about 0.2 per cent does the same.

Neither is an unusual market event. Ordinary daily ranges in major currency pairs are frequently larger than that. Leverage does not make a position more likely to be right; it shortens the distance between where the position is now and where it stops existing.

The costs that decide whether you are ahead

Retail CFD accounts are rarely lost on the headline price. They are lost on the running costs, which are easy to look past because each one is individually small:

• The spread — the gap between the buy price and the sell price. Every position starts slightly behind, and has to move in your favour by at least the spread before it is level.
• Overnight financing, often called swap. A leveraged position is a borrowed one, and holding it overnight is charged for. A position held for weeks can accumulate financing costs larger than the price move it was waiting for.
• Commission, where it is charged separately rather than folded into the spread.
• Currency conversion, when an instrument is priced in a currency other than the account's own.

Questions worth answering before funding anything

These are the questions that materially change what you are exposed to. Each is worth answering from a primary source — the regulator's own register, and the provider's own terms — rather than from a comparison page.

• Which legal entity would hold the account, and which regulator oversees that specific entity in your country of residence. A group can operate several entities under very different rules, and the protections attach to the entity rather than to the brand.
• What leverage cap applies to you. Retail caps differ substantially between jurisdictions, and a cap is a consumer protection rather than an obstacle to route around.
• Whether negative balance protection applies to the account. Without it, a gap in the market can leave you owing more than was deposited.
• How client money is held, and whether it is segregated from the provider's own funds.
• What the withdrawal terms and processing times actually are, read in the terms document rather than the marketing copy.
• Whether a demo account is available, so the platform and its execution can be tested with nothing at risk.

Who this tends not to suit

CFD trading is a poor fit as a first investment, as a source of predictable income, or as anything funded with money that is needed for something else. Regulated providers are required to publish the share of retail accounts that lose money, and that figure is required precisely because it is the part marketing does not lead with. It is the single most useful number to read before opening any account.

If the appeal is long-term exposure to a market rather than short-term price movement, a CFD is the wrong instrument for it, and the ownership costs and tax treatment of the alternatives are worth comparing first.

This page is general information, not financial or investment advice, and it does not recommend any provider. Trading CFDs carries a high risk of losing money rapidly due to leverage. See our full affiliate and risk disclosure for more.