Trading Instruments and CFDs
Most retail traders working with a broker like the ones covered on this site’s broker comparison tool aren’t buying the underlying asset at all, whatever the position on their screen seems to suggest. They’re trading a CFD, a contract for difference, and it pays to know exactly what that means before treating it like ownership.
What a CFD is
A CFD is an agreement between you and your broker to exchange the difference in an instrument’s price between opening and closing the position, and you never take delivery of the actual shares, barrels of oil, or currency involved. If GER40 rises 50 points after you buy a CFD on it, your broker pays you the cash equivalent of that move, and if it falls, you pay them, but at no point do you own any piece of the German stock market.
Why retail traders use them
CFDs open up markets that would otherwise be expensive or impractical to access directly, because buying a genuine basket of shares to replicate an index yourself takes real capital and ongoing management most people don’t have. They also make it straightforward to go short, to profit from a price falling, which is far more awkward with a physically owned asset. On top of that, CFDs are typically traded on margin, which is what makes leveraged position sizes possible on a retail account in the first place.
What you give up
Because you don’t own the underlying asset, you don’t get shareholder rights, no voting rights on a company you hold a stock CFD in, and in most cases no actual dividend, though brokers often credit an equivalent cash adjustment instead. You’re also exposed to counterparty risk: a CFD position only pays out if your broker itself remains solvent and able to honour it, which is why regulation and broker choice carries as much weight as the trade itself.
Key takeaways
- A CFD pays out the cash difference in price between opening and closing a position, with no ownership of the underlying asset
- CFDs make it practical to access markets like indices and commodities without the capital needed to own them directly
- Going short is straightforward with a CFD, unlike with a physically owned asset
- Margin trading, and therefore leverage, is only possible because a CFD isn’t a full-value purchase of the underlying
- CFD traders give up shareholder rights and take on counterparty risk with their broker, which is why broker regulation matters
Nothing on this page is financial advice. Trade your own account, manage your own risk.
Nothing on this page is financial advice. Trade your own account, manage your own risk.