CFDs & Leveraged Foreign Exchange

A Contract for Difference (CFD) is a bilateral contract between an investor and a CFD provider to exchange, in cash, the DIFFERENCE in the price of an underlying asset between the time the contract is opened and the time it is closed. The underlying can be a share, stock index, currency pair, commodity or bond.

The defining feature is that there is NO OWNERSHIP OF THE UNDERLYING. The investor never takes delivery of the share, currency or commodity — they hold only a contractual exposure to its price movement. As a result a CFD holder gets no voting rights and no direct legal title, though the contract is typically adjusted to reflect corporate actions and dividends on the underlying.

CFDs are DERIVATIVES: their value is derived entirely from the underlying's price. They are usually traded OVER-THE-COUNTER (OTC) directly with a provider rather than on an exchange, so the provider is the investor's counterparty and often the price-maker.

A CFD can be taken LONG (buy — profits if the price rises) or SHORT (sell — profits if the price falls). The ability to go short as easily as long, and to gain exposure without buying the asset outright, are the main attractions of CFDs.

Profit or loss = (closing price − opening price) × number of units × position direction. For a LONG position the investor gains if the price rises and loses if it falls; for a SHORT position the reverse applies.

Because the position is settled purely in cash on the price difference, the full notional value of the underlying is never paid. The investor deposits only a fraction — the MARGIN — yet gains or loses as if they held the full notional amount.

This is what makes a CFD a LEVERAGED product: the profit and loss are calculated on the whole notional exposure, not on the small amount of margin actually put up.