CFD certificates are financial instruments that allow you to make leveraged investments in a wide variety of different assets. CFD:s are always based on a financial asset. This asset can be a stock, a currency pair, an index, or a commodity or almost any other publicly traded asset. The financial value of the asset governs the value of the CFD. If the value of the asset goes up then the value of the CFD go up. If the value of the asset goes down then the value of the CFD will go down. There are also so-called bear CFD:s. These options increase in value when the asset goes down in value. It is possible to trade leveraged CFD:s. You can read more about what this means further down in the article.
CFD stands for contract for difference. The name describes how the instrument works. You enter into a contract with the CFD provider and the financial result is based on the difference between the opening price and closing price of the position. If the difference moves in your favour you make a profit. If it moves against you, you make a loss. This makes CFDs relatively easy to understand at a basic level even though leverage, margin, spreads and financing can make the actual risk much greater than the simple price chart suggests.
CFDs can be used to speculate on both rising and falling markets. A trader who expects an asset to rise can open a long position. A trader expecting it to fall can normally open a short position instead. This flexibility is one of the main reasons CFDs are popular among active traders. It is possible to move between shares, stock indices, currencies and commodities without having to open a separate traditional investment account for every type of asset.
It is essential to understand that you never own the underlying asset when you buy a CFD. The CFD is a contract between you and the broker. It has no other value. CFD:s are designed with day traders in mind and are meant to be bought and sold on the same day. You have to pay a fee if you want to hold your CFD:s overnight.
This lack of ownership has practical consequences. If you trade a CFD based on a company share, you do not normally receive shareholder voting rights because you do not actually own the share. Dividend payments may be reflected through adjustments to the CFD position, depending on the broker and whether you are long or short, but this is not the same as receiving an ordinary dividend as a shareholder. The CFD is primarily a way to gain exposure to a change in market price.
CFDs are often most suitable for relatively short holding periods. This is because leveraged positions can attract overnight financing costs when they remain open beyond the broker’s daily cut-off time. A trader holding a position for a few hours might mainly care about the spread and any commission. A trader keeping the same position open for several weeks also has to consider the cumulative cost of financing. What looks inexpensive on the day the position is opened can become much more costly if it remains open for a long period.
Why you should trade CFD:s
There are many reasons why you should trade CFD:s. They:
- Make it possible to earn large returns without having to invest large amounts of money.
- Allow you to make a living as a day trader without already being rich. USD 10 000 or less can be enough to get started.
- Allows you to make money in any market. You can profit from assets going up or down in value.
- Instant transactions. You do not have to wait until you find a buyer for your assets.
- Low trading fees for short term transactions.
- Large selection of brokers to chose among.
- Allows you to trade all major currency pairs, major stocks, indices, and many commodities.
The ability to take both long and short positions deserves particular attention. Traditional investors are naturally biased towards rising markets because they normally purchase an asset first and sell it later. CFDs make bearish trades easier because the trader can generally open a sell position without first owning the underlying asset. This can be useful during falling markets or for traders whose methods are designed to trade momentum in either direction.
The broad market selection is another advantage. A single CFD account can often provide exposure to stock indices, shares, currency pairs, precious metals, energy products and other markets. This allows an active trader to concentrate on whichever markets currently provide suitable conditions instead of depending on one stock or currency pair. The same flexibility can become a problem if it encourages constant switching between markets that the trader does not properly understand.
Leverage can also make CFDs capital efficient. A trader does not normally have to deposit the full market value of a position. Instead, the broker requires margin representing a portion of the total exposure. This can free capital for other positions or allow an active trader to operate without placing the entire value of every position with one broker. The advantage only remains an advantage when the trader controls the final position size. Using the additional buying power simply to place much larger trades increases risk very quickly.
How leverage works
Leverage is one of the most important concepts to understand before trading CFDs. It allows you to control a position that is worth more than the amount of cash you have deposited as margin. A broker might, for example, require you to deposit only a percentage of the total position value. The exact margin requirement varies according to the broker, market, regulation and volatility of the underlying asset.
Imagine that you use USD 1 000 of margin to control a CFD position worth USD 10 000. If the underlying market rises by 2%, the position changes in value by approximately USD 200 before costs. This is only a 2% movement in the underlying asset but it is equivalent to 20% of the USD 1 000 originally used as margin. The same mathematics works against you if the market falls. A 2% adverse movement would create a loss of approximately USD 200.
It is therefore a mistake to think of the amount of required margin as the amount at risk. Margin is simply the collateral required by the broker to maintain a position. The actual financial exposure comes from the full position size. Traders who ignore this distinction can accidentally take positions that are many times larger than they intended.
Leverage is not automatically bad. An experienced trader can use leverage while keeping the actual financial risk relatively small. The problem appears when maximum available leverage determines position size. A broker might allow you to open a much larger trade, but this does not mean that opening that trade is sensible. Position size should instead be calculated from how much you are prepared to lose if the trade goes wrong.
Margin calls and forced closing
Because CFDs are leveraged, brokers need to make sure that there is enough money in the account to support open positions. If losses reduce your account equity too far, the broker can require additional margin or begin closing positions according to the rules that apply to your account. The exact process depends on the broker and local regulation.
A forced close should never be treated as a normal exit strategy. By the time a broker begins closing positions because there is not enough margin left, a large part of the trading capital may already have disappeared. Experienced traders normally decide where a position becomes invalid before entering the trade and use stop losses or manual exits well before the account reaches this stage.
Maintaining spare margin also matters when several trades are open simultaneously. A trader can appear adequately funded while markets are quiet and then experience several positions moving in the wrong direction at once. This is one reason opening the maximum position size allowed by the platform can be dangerous even if each individual trade initially appears manageable.
Why you should not trade CFD:s
Below you will find some of the reasons why you should not trade CFD:s.
- The trade is very high risk. High leverage increases this risk.
- You can lose more money than you invested.
- You can lose more money than you have deposited to your account. There is no limit to how much money you can lose. (Loses are limited to the money in your account if you are located within the EU and trade with a broker based within EU.)
- Trades should never be left unsupervised.
- You need to pay a fee if you keep your position open overnight.
- Should never be traded by passive investors. Only suitable for very short term trades.
The largest problem is that leverage changes the speed at which mistakes become expensive. An investor owning an unleveraged share can experience a 1% market decline and lose approximately 1% of the position value. A heavily leveraged CFD trader can experience a much larger percentage change in account equity from the same underlying movement. This makes position sizing far more important than it is for many conventional investments.
Trading costs also matter. A position usually starts at a small loss because of the difference between the buy and sell price. Some CFD brokers charge a separate commission, especially on share CFDs, while others build more of their revenue into the spread. Positions kept open overnight can also attract financing charges. A strategy can therefore appear profitable before costs while producing a much weaker result after all charges have been included.
CFDs can also encourage overtrading because opening a new position is extremely easy. Hundreds or even thousands of markets might be available through one platform. After a losing trade, it takes only seconds to move to another chart and try again. Without clear rules, this convenience can turn into revenge trading, excessive position sizes and a growing number of low quality trades.
CFD trading costs
CFD traders need to consider all costs rather than focusing only on the advertised spread. The spread is the difference between the buy and sell price quoted by the broker. It creates an immediate cost because the market normally has to move in your favour before the trade becomes profitable.
Some brokers also charge commission. This is especially common for share CFDs and accounts designed to provide tighter underlying spreads. A raw or very tight spread is therefore not automatically cheaper than a wider spread with no separate commission. You need to calculate the complete cost of opening and closing a position.
Overnight financing can become particularly expensive on leveraged trades held for long periods. The charge is normally linked to the total position value, not simply the margin deposited. This means that a position supported by a relatively small amount of cash can generate financing costs based on a much larger market exposure. Day traders who close positions before the financing cut-off may barely notice this cost. Swing traders can pay it repeatedly over many days.
Slippage is another cost that does not always appear on the broker’s fee table. An order can execute at a worse price than expected if the market is moving quickly or liquidity is poor. This is particularly relevant around economic announcements, company news and unexpected market events. Small amounts of slippage can have a noticeable impact on very short term strategies where the target profit on each trade is small.
Stop losses do not guarantee your exit price
A stop loss tells the broker to close a trade after the market reaches a chosen level. It is one of the most useful tools for controlling CFD risk, but an ordinary stop cannot guarantee that the final execution will occur at the exact stop price.
If a market moves quickly through the chosen level, the order may execute at the next available price. This can happen after unexpected news or when a market reopens after being closed. A share could close at USD 20 with a stop at USD 19 and then open the following session at USD 16 after extremely bad company news. There may have been no opportunity to close at USD 19.
Some brokers offer guaranteed stop loss orders for certain markets. These can provide greater certainty but normally involve an additional charge or other conditions. Traders should understand whether their stop is ordinary or guaranteed rather than assuming every stop provides exactly the same protection.
CFDs for day trading
CFDs are widely associated with day trading because many of their features suit positions that remain open for only a short period. Traders can move quickly between long and short exposure, access several markets through one account and close positions before daily financing becomes a major issue.
Day traders can use CFDs to speculate on stock indices, individual companies, currencies and commodities. A trader might open a position in the morning and close it several hours later, or hold a trade for only a few minutes. The shorter the intended movement, the more important spreads and execution become. A strategy targeting a small move cannot afford to give a large portion of that expected profit back to the broker through transaction costs.
The ability to trade frequently should not be confused with a requirement to trade frequently. Many of the worst CFD losses come from taking too many positions rather than from one carefully planned idea going wrong. A day trader needs rules for when not to trade as much as rules for entering a position.
CFDs for swing trading
CFDs can also be used for swing trading where positions remain open for several days or weeks. The main advantage is that the trader can obtain long or short market exposure without paying the full underlying position value. The main disadvantage is that financing costs can build each night.
A swing trader should therefore estimate financing before opening a position rather than looking only at the spread. A trade that appears attractive when expected to last three days might become much less attractive if it remains open for a month. Larger leveraged positions make this problem more noticeable because financing is linked to the position value.
Overnight and weekend gaps also matter more for swing traders than for traders who finish every day without open positions. Economic events, political news or company announcements can cause the underlying asset to reopen at a very different price. Position size should allow for the fact that realised losses can occasionally exceed the amount originally planned at the stop.
CFDs compared with owning the underlying asset
Buying an asset and trading a CFD based on that asset can produce similar short term price exposure, but the two transactions are not the same. A shareholder actually owns the shares. A CFD trader owns a contract referencing their price.
Ownership can be more suitable for long term investors because there is normally no daily leveraged financing charge simply for continuing to own a fully paid share. A CFD trader holding an equivalent long position can pay financing for as long as the leveraged contract remains open. Over months or years this can become a substantial difference.
CFDs have advantages for short term traders because they require less capital upfront and make short positions easier to establish. The correct instrument therefore depends on what the trader is trying to do. A CFD should not automatically replace conventional investing simply because the initial margin requirement is smaller.
Choosing a CFD broker
Choosing the right CFD broker requires more than comparing the number of markets available. Regulation, costs, execution and withdrawal procedures all matter. A broker can advertise extremely low spreads but still be expensive if commissions, overnight financing or currency conversion charges are high.
You should also identify the legal company that actually provides the account. Large brokerage brands can operate through several companies in different countries. Accounts offered under the same brand can therefore have different leverage limits, protections and complaint procedures. Read the terms of the account rather than assuming that one licence held somewhere within a group applies everywhere.
The trading platform matters after the broker itself has passed these checks. The platform should be stable, provide the order types you need and make it easy to see open exposure, margin requirements and current profit or loss. Automated traders might also require support for trading algorithms or API access.
Deposits are easy at most online brokers. Withdrawals tell you more. A reputable broker should provide clear withdrawal procedures and should not invent unexpected taxes, insurance payments or release fees before returning your own money. Difficulty withdrawing funds is one of the strongest warning signs when dealing with an unknown provider.
Is it a scam?
CFD certificates are sometimes referred to as scams. This is not true. At least not if you trade using a reputable, regulated broker. CFD certificates can be a very powerful tool if used correctly. The reason that CFD:s are sometimes misunderstood is that they have been used by dishonest financial advisors to scam their customers out of money. They fool their clients into investing in CFD certificates without telling them the risk associated with the trades. Some financial advisors will even willingly lose their clients’ money to get the referral commission from the broker.
The distinction between a risky financial instrument and an outright scam is important. A legitimate CFD trade can lose money even when the broker has done everything correctly. The market simply moved against the trader. A scam involves deception, such as fabricated account balances, false claims of guaranteed returns, manipulated withdrawals or a company pretending to have regulatory approval that it does not possess.
Fraudulent CFD and forex websites can look extremely professional. A trading platform can display charts, profits and an account balance without proving that genuine market transactions are taking place behind the screen. Some scams encourage a customer to make a small first deposit, show rapid profits and then apply pressure to deposit a much larger amount. Problems appear only when the customer asks to withdraw money.
Be particularly careful if someone contacts you unexpectedly, promises guaranteed profits or claims that you need to pay an additional fee before a withdrawal can be released. Markets are uncertain. A broker, account manager or trading robot that genuinely guarantees a high return would have solved a problem that the rest of the financial industry has not solved.
Risk management when trading CFDs
Risk management should begin before the trade is opened. First decide where the market would need to move for your trading idea to be considered wrong. Then decide how much money you are prepared to lose if price reaches that level. Only after answering those two questions should you calculate the position size.
For example, suppose you are willing to risk USD 100 and the distance between your entry price and stop represents USD 1 of risk for each unit of the underlying asset. A position equivalent to 100 units would create approximately USD 100 of planned risk before trading costs and possible slippage. If another trade needs a stop four times as wide, the position should normally be reduced if you want to keep the same amount of money at risk.
This process prevents a common mistake where traders use the same position size regardless of market volatility. Two positions worth the same amount can have very different risk if one asset moves several times further each day than the other.
It is also sensible to consider total account exposure. Five separate trades risking USD 100 each can create USD 500 of combined risk, and the positions might be correlated. Buying several technology stock CFDs at the same time can effectively create one large bet on the technology sector even though the platform displays several separate positions.
Who should trade CFDs?
CFDs are best suited to active traders who understand market risk, leverage and position sizing. They can be useful for day traders, swing traders and experienced market participants who want to take short positions or gain temporary exposure without purchasing an underlying asset.
They are generally less suitable for passive investors who simply want to buy a diversified portfolio and hold it for many years. Long term investors usually have less need for daily leverage and can be harmed by financing costs that accumulate while a CFD remains open.
Beginners should be particularly cautious. Learning how a trading platform works is relatively easy. Learning how to manage a leveraged position during a volatile market is harder. Demo accounts can be useful for understanding order entry and margin calculations, although simulated trading cannot fully reproduce the psychological effect of losing real money.
Starting with small positions gives a new trader more time to learn without allowing one ordinary mistake to become financially serious. A strategy should ideally be tested across enough trades to determine whether it has a genuine advantage rather than being judged from one or two successful positions.
CFD:s are not suitable for passive investors, and 99% of all readers should avoid trading CFD:s. The one exception from this rule is if you are an active day trader. If you are then CFD certificates can be the most powerful tool you have available to you. Many day traders make almost all their money trading leveraged CFD certificates.
Even active traders should approach CFDs as a tool rather than as a source of automatic profits. The contract makes it easy to create market exposure, but it cannot provide a profitable trading method. Results still depend on entry and exit decisions, trading costs, risk control and the ability to avoid increasing position size after losses.
The most useful way to think about CFDs is therefore as a flexible but aggressive trading instrument. They provide convenient long and short exposure across many markets and allow capital to be used efficiently. Those same features can make mistakes expensive. Traders who understand the full position value, keep leverage under control and include every trading cost in their calculations are in a much better position than traders who focus mainly on how little margin is required to open the trade.
This article was last updated on: September 14, 2026