Glossary · UK
What is Contract for Difference (CFD)?
A leveraged derivative contract to exchange the difference in an asset’s price between opening and closing a position, without owning the asset.
Full Definition
A Contract for Difference (CFD) is a derivative product that lets an investor speculate on the rise or fall of an asset's price -- shares, indices, currencies, or commodities, for example -- without ever owning the underlying asset itself. The investor and the provider agree to exchange the difference between the asset's price when the contract is opened and when it is closed: if the price moves in the investor's favour, the provider pays the difference, and if it moves against them, the investor pays it. CFDs are traded on margin, meaning the investor only puts up a fraction of the full position's value as collateral, which magnifies both potential gains and potential losses relative to the amount invested, and losses can exceed the original deposit unless the provider offers negative balance protection (mandatory for retail clients under FCA rules). Because CFDs are complex, leveraged products, the FCA requires providers to show a prominent risk warning stating the percentage of retail client accounts that lose money trading CFDs with that provider, and it has banned CFDs on cryptoassets for retail investors. Profits from CFD trading are generally subject to Capital Gains Tax rather than Income Tax for most private individuals, and CFDs cannot be held inside an ISA or SIPP, unlike shares, funds, and some other investments; spread betting, in contrast, is a similar leveraged product but is normally free of Capital Gains Tax for UK residents (see spread-betting-tax-treatment).