What are CFDs? CFD trading meaning, with a worked example

What is a CFD? The meaning in law

The EU definition, written by ESMA in 2018 and still used by national regulators, calls a CFD “a derivative other than an option, future, swap or forward rate agreement” that gives the holder a long or short exposure to the price of an underlying and is settled in cash. In UK law, article 85 of the Regulated Activities Order covers contracts that aim to make a profit or avoid a loss from price changes, and leaves out contracts where the parties intend one of them to take delivery of the asset.

That is what “tradable as CFD” means on a broker’s instrument list: you can take a position on the price of that share, index, commodity or currency pair, but the broker will not deliver it to you. Your CFD trading account shows a profit or loss in cash, and nothing else.

How do CFDs work? A CFD trade example

You expect a UK company’s shares, now at £4.00, to rise. You buy 1,000 share CFDs: a position worth £4,000. At the FCA’s 1:5 cap on individual shares, the broker holds back £800 of your balance as margin. To keep the arithmetic plain, the account holds exactly £800.

Rules for retail clients of UK and EU firms close your positions when your equity falls to 50% of the initial margin. Here that is £400 of equity, reached after a loss of £400: a share price of £3.60, a 10% fall.

Negative balance protection, which UK and EU rules require for retail clients, stops a gap in the price from leaving you owing the broker more than your account balance.

CFD margin at 1:30, 1:20, 1:10 and 1:5

The leverage cap depends on how volatile the asset is. ESMA set these ratios for the EU in 2018, the FCA made them permanent for UK retail clients from 1 August 2019 in PS19/18, and ESMA confirmed in February 2026 that every EU national regulator has adopted permanent measures, mostly mirroring its own. The same £10,000 position needs this much margin:

Cryptocurrency CFDs are capped at 2:1 in the EU; in the UK, crypto derivatives may not be sold to retail clients at all. Professional clients are not bound by these caps and lose negative balance protection.

What CFD trading costs: spread, commission and overnight funding

Every CFD has a buy and a sell price; the gap is the spread, paid when you open. Some accounts add a commission for a tighter spread. On EUR/USD, Pepperstone quotes from 1.0 pips on its Standard account and from 0.0 pips plus GBP 2.25 per lot per side on its raw account, according to its published terms. Pepperstone, CMC Markets and Admirals (Admiral Markets) lead this guide’s list, which ranks brokers by those published costs.

The third cost is overnight funding: the broker charges interest on the full value of the position, not on your margin, for each night it stays open. The FCA found in October 2026 that these fees “vary considerably” between firms and between assets, and that most firms charge them on both legs of a hedged position. Only a minority show an annual rate next to the daily one. With an assumed rate of 6% a year, used only for the arithmetic, our £4,000 share position costs £0.66 a night and £19.73 over 30 nights.

• Ask for the funding rate as a yearly percentage: the FCA found in 2026 that only a minority of firms show one.
• Count the charge on the position value: at 1:5, funding is five times larger relative to your margin than relative to the position.
• Check whether funding is charged on weekends and holidays.

What you can trade as a CFD: forex, indices, commodities, shares and bonds

In the UK, retail forex at a broker is usually a rolling spot forex contract. The FCA Glossary defines it as an off-exchange future on currency, or a contract for differences “by reference to fluctuations in foreign exchange”, entered into for speculation. So “what is CFD trading in forex” has a short answer: the same contract as any other CFD, with a currency pair as the underlying and the highest retail leverage cap.

Index CFDs follow a stock index, commodity CFDs follow gold, oil or another commodity, share CFDs follow one company, and bond CFDs follow the price of a government bond. The definition is the same for each; what changes is the leverage cap in the table above, and therefore how far the price can move before your margin runs out.

Who regulates CFD trading in the UK, EU and Australia

In the UK the FCA sets the rules in PS19/18: leverage caps, close-out at 50% of required margin, negative balance protection, no cash or other incentives to trade, and a standard warning with the share of the firm’s retail accounts that lose money. CySEC and the other EU regulators apply the same package. ASIC’s CFD order in Australia, in force since 29 March 2021, limits leverage from 30:1 to 2:1 and is due to expire on 23 May 2027; ASIC proposed in October 2026 to extend it for ten years.

Of the 20 brokers in our data, 19 have a Tier 1 company that takes retail clients, and 17 run an offshore company where these rules do not apply. The published loss rates show how CFD trading tends to go: 58.9% to 76% of retail accounts lose money at the 9 UK companies in our data, and 58.9% to 88% across all 37 companies, the highest at Pepperstone Markets Kenya Limited.

What a CFD is not

A CFD is not ownership. You are not on the company’s share register, and the position exists only in your account at the broker that wrote the contract.

It is not an exchange-traded contract. Futures and listed options trade on an exchange with a clearing house between buyer and seller; a CFD is a private contract with your broker, so the broker’s regulator and the company you sign with matter more than the asset.

It is not taxed like a share purchase in the UK. HMRC’s manual says opening or closing a CFD involves no purchase of a chargeable security, so there is no Stamp Duty or Stamp Duty Reserve Tax, while buying shares electronically usually costs 0.5%: £20 on our £4,000 example. This is general information, not tax advice; your position depends on your circumstances, so check HMRC guidance or a tax adviser.