Explainer · Costs & Regulation
What is a CFD, and why do most retail accounts lose?
A contract for difference lets you bet on a price without owning the asset, using a small deposit to control a much larger position. Regulators in Europe and Australia have found that most retail clients who traded them lost money.
Quick answer
A CFD (contract for difference) is a leveraged contract that pays or charges you the difference between an asset's price when you open and when you close [1]. You never own the asset. Regulator data from the EU (2018) and Australia (2024) shows most retail CFD accounts lost money [5] [6].
Key points
- Your profit or loss is the price difference between opening and closing, measured on the full position, not your deposit [1].
- With $500 of margin on a $10,000 position, a 5% move against you wipes out the whole deposit (calculated).
- Costs include spreads, commissions and overnight financing, which ASIC warns can be high [1].
- ASIC reported that 68% of retail CFD investors in Australia lost money in the 2024 financial year [6].
- CFDs are not traded on an exchange, so you also depend on the provider meeting its obligations [1].
On this page
What is a CFD?#
A CFD, short for contract for difference, is a derivative: its value comes from something else. Australia's regulator, ASIC, describes the underlying asset as shares, commodities, currencies, crypto assets or market indices [1]. When you trade a CFD you do not own any of these. You make a contract with a provider and take a view on whether the price will rise or fall [1].
ESMA, the EU securities regulator, put the deal simply in a 2013 investor warning: buyer and seller agree to exchange the difference between the asset's price now and its price when the contract is closed [2]. If the difference is in your favour, the provider pays you. If not, you pay the provider [2].
The UK Financial Conduct Authority requires CFD firms to warn that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage [3]. That warning is the core of this page.
How does a CFD make or lose money?#
CFDs use leverage. You put down a small amount, called margin, to take a much larger position, and gains and losses are based on the full value of the position, not your margin [1]. ASIC's own example uses $500 of margin to open a $10,000 position [1]. That is leverage of 20 to 1 (calculated).
The table uses ASIC's figures: $500 of margin, a $10,000 buy position. It ignores costs, which would make every row worse.
| Underlying price move | Profit or loss | As a share of the $500 margin |
|---|---|---|
| Price rises 5% | +$500 | +100% |
| Price rises 1% | +$100 | +20% |
| Price falls 1% | -$100 | -20% |
| Price falls 3% | -$300 | -60% |
| Price falls 5% | -$500 | -100% |
All values calculated on a $10,000 position. Moves in the opposite direction mirror these for a sell position.
What does it cost to hold a CFD?#
ASIC lists commissions, spreads and overnight financing fees, and warns these fees and costs can be high [1]. ESMA's warning adds account management fees and taxes [2].
Overnight financing deserves special attention because it grows with time. The FCA's 2025 review found wide variations in the effective interest rates retail clients paid through overnight funding charges, and found firms charging each position separately, with no offset for a buy and a sell on the same market [4]. As an illustration only, if a provider charged an assumed 6% a year on the full $10,000, thirty nights would cost about $49.32, nearly a tenth of the $500 margin (calculated). Real rates and methods differ by provider.
Our guide to trading fees explained works through spread, commission and financing on a single trade.
Why do most retail CFD accounts lose money?#
Regulators point to the same causes: leverage, costs and complexity. In its 2018 decision, ESMA said the inherent complexity of the products and, for CFDs, their excessive leverage had resulted in significant losses for retail investors, and it also cited their lack of transparency [5]. ASIC states that leverage and the financing fees that come with it can magnify investor losses [6].
The loss figures come from different countries and years, so read each one with its date.
- EU national analyses cited by ESMA (2018)
- 74-89%of retail accounts typically lost money [5]
- Average loss per client in those analyses
- €1,600 to €29,000ESMA, 2018 [5]
- Australia, 2024 financial year
- 68%of retail CFD investors lost money, over $458 million in total [6]
- Of which fees
- $73 millionASIC, 2026 release [6]
ASIC also reports that most retail investors stop trading CFDs within a year [1]. In the closely related market for off-exchange forex in the US, the CFTC reports that about two-thirds of customers at registered dealers lost money, based on dealer disclosures from Q2 2021 to Q1 2022 [7].
There is one more risk that has nothing to do with the price. CFDs are not traded on a licensed exchange, so you rely on the provider to meet its obligations to you, which ASIC calls counterparty risk [1]. ESMA warned in 2013 that if client money is not properly segregated and the provider gets into financial difficulty, you may not get your money back [2].
What rules limit CFDs for retail traders?#
Rules differ by country and change over time. The table shows what our sources state, with the date of each source. A rule protects you only if your account is with a firm covered by that regulator.
| Where | What the source states | Source date |
|---|---|---|
| European Union | ESMA's 2018 measures capped retail CFD leverage from 30:1 for major currency pairs down to 2:1 for crypto, required close-out at 50% of the minimum required margin, and added negative balance protection per account [5] | March 2018 |
| United Kingdom | Minimum margin of 3.33% (30:1) on major currency pairs, close-out at 50% of required margin, losses limited to the funds in the account; crypto derivatives may no longer be sold to retail clients [3] [8] | 2019 rules, checked against the FCA Handbook in 2026 |
| Australia | ASIC's order sets leverage limits from 30:1 to 2:1, standard margin close-out and negative balance protection, extended to 23 May 2027 [9] | April 2022 |
| United States (retail forex) | Leverage above 2% margin for major currency pairs or 5% for others is above the US legal limit and a red flag [7] | Undated CFTC advisory |
We have no primary source on whether CFDs are offered to US retail clients, so we do not make that claim. Check the current rules with your own regulator.
Did the limits help? ASIC reported that in the first six months of its order, aggregate net losses on retail client accounts fell 91%, from an average of $372 million to $33 million a quarter, and margin close-outs fell 87% per quarter on average [9]. Lower leverage did not make CFDs safe: the 68% loss figure for 2024 came after those rules were in place [6]. To see what a given leverage ratio means for your deposit, try the margin calculator.
How should a beginner check a CFD provider first?#
- Confirm the firm is authorised
Search the regulator's own register, not a link the firm sends you. Our guide on how to check if a broker is regulated lists registers by country.
- Price a sample trade
Ask for the spread, commission and overnight financing on one position you might take, and add them up in money before you deposit.
- Check the protections on your account
Look for negative balance protection and the margin close-out level in the client agreement, and note which entity of the group holds your money.
Mistakes beginners make with CFDs#
- Measuring risk by the deposit
Gains and losses follow the full position, not the margin [1]. A $500 deposit on a $10,000 position is a $10,000 bet.
- Holding for weeks without pricing financing
Overnight charges keep running every night and rates vary widely between firms [4].
- Treating a high leverage offer as a feature
Leverage beyond the limits in your country is a warning sign. The CFTC calls leverage above the US legal limit for forex a red flag [7].
- Assuming you own the asset
A share CFD gives you no share, and you rely on the provider to pay what it owes [1].
- Opening an opposite trade to hide a loss
ASIC found clients holding opposing positions paid higher funding costs but could not profit from them [6].
Frequently asked questions#
Is a CFD the same as buying a share?
No. With a CFD you do not own the underlying asset; you have a contract with a provider that settles the price difference [1].
Can I lose more than I deposit with a CFD?
It depends on the rules covering your account. ASIC warns that losses can quickly exceed the margin used to open a position [1]. ESMA's 2018 measures introduced negative balance protection per account [5], and UK rules limit a retail client's losses to the funds in the account [3]. Check the terms of your own provider.
Why are CFDs restricted in some countries?
Regulators found that retail clients lost money at high rates. ESMA cited complexity, lack of transparency and excessive leverage when it restricted CFDs in 2018 [5].
Are CFDs and spread betting the same?
Our sources do not cover spread betting, so we do not compare the two here. Read the product's key information document and the regulator's own guidance before trading either.
The bottom line#
A CFD is a contract that pays or charges the price difference on a position much larger than your deposit. That leverage, plus spreads and nightly financing, is why regulators in Europe and Australia have reported that most retail accounts lose. If you still want to trade one, check the provider on the official register, price the full cost of a trade first and risk only money you can afford to lose. Our cfd meaning entry gives the short definition, and our risk disclosure explains how we write about leveraged products.
Sources
- Contracts for difference (CFDs) - Moneysmart.gov.au.
- Contracts for difference (CFDs).
- PS19/18: Restricting contract for difference products sold to retail clients.
- Multi-firm review of contracts for difference providers' provision of price and value.
- ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors.
- 26-004MR ASIC secures nearly $40 million in refunds to investors and drives change after CFD sector falls short.
- Customer Advisory: Eight Things You Should Know Before Trading Forex.
- COBS 22.6 Prohibition on the retail marketing, distribution and sale of cryptoasset derivatives and cryptoasset exchange traded notes (FCA Handbook).
- 22-082MR ASIC's CFD product intervention order extended for five years.
Education only. This page is not investment, tax or legal advice. Trading and crypto can lose you money. See our risk disclosure.
