What is a CFD, in plain words
A CFD, or contract for difference, is an agreement between you and a provider to exchange the difference in an asset's price between the moment you open the contract and the moment you close it.
You never own the asset. If you open a CFD on gold, a stock index or a currency pair, you hold a contract that tracks its price. When you close it, the price difference is settled in cash. If the price moved your way, the provider pays you the difference. If it moved against you, you pay it.
That is the core meaning of CFD trading. Long and short positions, leverage, margin and costs are all ways of shaping that cash difference.
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How a CFD trade works
Every CFD trade has three parts:
- Opening price. The price at which you enter. You buy at the ask and sell at the bid (see bid and ask).
- Size. How many units or lots the contract covers.
- Closing price. The price at which you exit.
The result before costs is the price difference multiplied by the size. A small price move on a large size gives a large result, in either direction.
To see the result of a closed trade in money and pips, enter your instrument, direction, size, opening price and closing price here:
Fill in the empty fields to see the result.
The calculator shows the inputs it used next to the result, so you can check each step. For the method behind it, see profit and loss calculation.
Long and short
A CFD lets you take either side of a price move:
- Long (buy). You gain if the price rises and lose if it falls.
- Short (sell). You gain if the price falls and lose if it rises.
Going short does not require borrowing the asset, as it does with shares. You simply open a sell contract. On a short CFD the loss has no natural ceiling, because a price can keep rising. More detail: going long and short.
Leverage and margin
CFDs are almost always traded with leverage. You put up only part of the position's value, and the provider lets you control the full position.
- Margin is the amount set aside from your account to keep a position open. It is a deposit, not a fee. See what is margin.
- Leverage is the ratio between the position's full value and the margin. See what is leverage.
Leverage does not change how much the price moves. It changes how much of your own money that move represents. Profit and loss are always calculated on the full position size, not on the margin.
If losses reduce your equity too far, you may first receive a margin call. After that, the provider can close positions automatically at the stop-out level. During price gaps or slippage, the closing price can be worse than the level you expected.
What a CFD costs
The price difference is not the whole result. Costs reduce it:
| Cost | What it is | When it applies |
|---|---|---|
| Spread | Gap between bid and ask | On every trade, at entry |
| Commission | Fee per lot traded | On some account types |
| Swap | Overnight financing charge or credit | When a position stays open past rollover |
Swap matters because leverage is in effect a loan for the part of the position you did not fund. Holding a CFD for weeks can cost noticeably more than holding it for hours. See total cost of a trade.
Who is on the other side: counterparty
A CFD is an over-the-counter (OTC) contract. It is not traded on an exchange. Your contract is with the provider, and the provider is your counterparty.
This brings risks that exchange trading reduces:
- The provider sets the prices, the margin rules and the contract terms.
- If the provider fails or refuses to pay, there is no exchange clearing house standing behind the trade.
- Some providers hedge client positions in the market, and others take the opposite side themselves. See broker execution models and OTC vs exchange-traded markets.
CFD vs futures vs owning the asset
| Feature | Owning the asset | Futures | CFD |
|---|---|---|---|
| You own the asset | Yes | No (unless physically delivered) | No |
| Where traded | Exchange or OTC | Exchange | OTC with provider |
| Leverage | Usually none | Yes, via exchange margin | Yes, set by provider |
| Expiry | None | Fixed expiry date | Usually none; rolled daily with swap |
| Contract size | Any amount | Standardised | Flexible, by lot |
| Counterparty | Seller, via exchange | Clearing house | Provider |
| Short selling | Requires borrowing | Built in | Built in |
| Holding cost | Custody, if any | Built into futures price | Daily swap |
Precise definitions for experienced traders
- Notional value: contract size multiplied by the current price. Margin is a fraction of it, and profit and loss track all of it.
- Mark-to-market: open positions are revalued continuously at current prices. Floating profit and loss changes your equity and free margin in real time, even though your balance changes only on close.
- Margin level: equity divided by used margin, shown as a percentage. Margin calls and stop-outs are triggered on it. See margin level.
- Financing: swap is usually derived from the interest rate difference relevant to the instrument, plus the provider's markup. On many platforms, the charge for the weekend is applied once midweek (triple swap day).
- Corporate and index adjustments: on share and index CFDs, dividends usually lead to a cash adjustment to long and short positions rather than an actual dividend payment.
- Underlying vs provider price: the CFD quote follows the reference market, but it is the provider's own price. Spreads can widen during low liquidity and high volatility.
CFDs and Pakistani law
Before trading CFDs from Pakistan, check how local rules treat them:
- On buying offshore products: per the SBP, the purchase of offshore forex/margin/CFD products by Pakistani residents violates section 4(1) of FERA 1947.
- On sending money abroad: per the SBP, remitting foreign exchange to overseas forex/margin/CFD platforms is not allowed through any payment channel (FERA s.5(1)).
- On regulatory status: per the SECP, offshore forex/CFD platforms operate without regulatory approval in Pakistan.
- On investor protection: per the SECP, offshore platforms have no Pakistani licence or oversight and offer no legal protection or recourse.
- The supervisor for local markets is the Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers.
Read these rules in full and decide with that knowledge. See law and regulators and regulation and safety.
Risk warning
CFDs are leveraged products. A small price move against you can wipe out your margin quickly, and fast markets can close your positions at worse prices than you planned. Many retail traders lose money on CFDs. See why retail traders lose money.
If you want to learn the mechanics, practise first with no real money (see demo vs live trading) and study risk management. Trade only with money you can afford to lose.
Frequent questions
What is CFD trading in simple words?
It is speculating on an asset's price through a contract with a provider. You gain or lose the price difference between opening and closing, multiplied by your position size, minus costs.
Do I own shares or gold when I trade a CFD?
No. You hold a contract that tracks the price. You have no ownership rights, no voting rights and no physical metal.
Can I lose more than my margin?
Your loss is based on the full position, not on the margin. Stop-out is designed to limit losses, but gaps and slippage can push the closing price past it. Check the provider's terms on negative balances.
How is a CFD different from a futures contract?
Futures trade on an exchange in standard sizes with fixed expiry dates and a clearing house behind them. CFDs are OTC contracts with the provider, usually without expiry, and are financed daily through swap.
Where do I calculate a CFD result?
Use the profit calculator on this page or the other tools in trading calculators. Every result there is shown together with the inputs used.