Contract for difference
Rules, protection and tax below are for China.
What it is
A contract for difference is an agreement with a broker to exchange the change in a price between opening and closing. You never own the share, index or currency; you own a bet against the broker, sized with leverage the broker lends you.
Two costs run in the background. The spread is paid every time you open, and the financing charge is paid every night on the borrowed part, typically the benchmark rate plus 2 to 3 percent a year. Held for months, financing quietly eats any edge; held for a day, the spread does.
Regulators in the UK, EU and Australia cap retail leverage at 30 to 1 on major currencies and lower elsewhere, require negative balance protection, and publish the share of clients who lose money. It is usually between 65 and 80 percent. The US bans retail CFDs outright.
How it works
- You deposit margin with a CFD broker and open a position many times its size, long or short.
- Profit or loss is the price change times the position size, credited or debited continuously.
- Each night financing is charged on the borrowed portion; each trade pays the spread.
- If losses approach your margin the broker closes the position; regulated brokers cannot let you go below zero.
The honest pros and cons
For
- Can profit from falling prices as easily as rising ones.
- Access to thousands of markets from one account with small sums.
- Regulated brokers must offer negative balance protection to retail clients.
Against
- Most retail clients lose money, and the brokers must tell you so.
- Financing charges make holding for more than days expensive.
- Leverage turns ordinary volatility into total loss.
- You are betting against the broker, whose pricing and execution you cannot see.
Getting it in China
Contract for difference unavailable
not permitted; leveraged margin trading on foreign platforms is illegal for residents
Wherever you are
- Read the broker's own disclosure of what share of clients lose; it is on the front page by law.
- If you still want to, use the lowest leverage the platform allows and treat the deposit as spent.
- Never fund it from money you need, and set a maximum loss before the first trade.
Try it
Go deeper
Also called
contracts for difference, CFD trading, margin trading
Often confused with
- Domestic shares: Part ownership of a company listed in your own country.
- Futures: A binding contract to buy or sell something at a set price on a future date, traded with borrowed exposure.
- Spread betting: A leveraged bet on a price move that is legally classified as gambling where it exists.