What Is a CFD Broker? How CFDs Work and What They Cost

Most retail forex trading is CFD trading, even though the term rarely appears in the marketing. Understanding what a CFD is changes how you think about what you own, what you are exposed to, and who you are exposed to.

What a CFD Is

A contract for difference is an agreement between you and the broker to exchange the difference in an asset’s price between the moment you open the position and the moment you close it. You never own the underlying asset.

Buy a gold CFD and no gold is bought anywhere. You hold a contract whose value moves with the gold price. Buy a share CFD and you get no shares, no voting rights and no direct dividend, although brokers typically apply a cash adjustment when a dividend is paid.

Why the Model Is Popular

• Leverage. A fraction of the position value is required as margin.
• Short selling is straightforward. There is no borrow to arrange, you simply open a sell position.
• One account, many markets. Currencies, indices, commodities, shares and crypto in the same platform.
• Fractional sizing. You can trade a position size that does not correspond to a whole contract.

Counterparty Risk Is the Part People Miss

A CFD is a contract with your broker. If the broker fails, you are a creditor. There is no exchange standing behind the position and no share certificate sitting in your name.

This is precisely why regulation matters more with CFDs than with almost any other retail product. Regulated brokers in major jurisdictions are required to hold client money in segregated accounts, and some jurisdictions offer a compensation scheme up to a limit if the firm fails. Offshore brokers frequently offer neither.

What CFDs Cost

Three charges apply. The spread is paid on entry. Commission applies on some instruments, most commonly share CFDs. And overnight financing, sometimes called swap, is charged for holding a leveraged position past rollover.

Overnight financing is the one that surprises people. It is small daily but it compounds, and it makes CFDs a poor vehicle for long term holding. A position held for months can accumulate financing costs that materially change the outcome.

Regulation and Restrictions

CFDs are restricted or banned in several jurisdictions. They are not available to retail clients in the United States. In the United Kingdom, the European Union and Australia they are permitted but with leverage caps, negative balance protection requirements, and mandatory risk warnings stating the percentage of retail accounts that lose money.

Those published loss figures are typically between 70 and 80 percent. They come from the brokers themselves under regulatory obligation, which makes them the most reliable statistic in the industry.

What to Check Before Opening an Account

1. Which authority regulates the entity you will actually contract with, and verify the licence on the regulator’s own register.
2. Whether client funds are segregated.
3. Whether negative balance protection applies to your account type.
4. The overnight financing rate on the instruments you intend to hold.
5. Whether any compensation scheme covers you, and to what limit.

If you are comparing execution models as well, our guide to ECN brokers covers how order routing differs between broker types.