A leveraged bilateral contract paying the difference between an asset's opening and closing price, with no ownership of the underlying and no exchange involved.
CFDs offer high leverage on small accounts, which is why regulators in several jurisdictions have capped retail leverage, mandated negative balance protection, and required firms to publish the percentage of retail accounts that lose money. Those published figures are typically between 70% and 80%.
The provider is the counterparty and usually the price maker, so the client's loss can be the provider's gain unless positions are hedged externally. Financing is charged daily on the full exposure, which makes holding periods expensive.
CFDs are prohibited for retail clients in the United States. Where permitted, they sit alongside spread betting and similar products as the retail end of the total-return-swap family.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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