A CFD is a financial derivative. It is a Contract between you and your broker to exchange the Difference in the price of an asset from the moment you open the trade to the moment you close it. No actual asset changes hands—it's purely a bet on price direction.
When you "buy" Apple via a CFD, you receive zero shares. You receive no voting rights, no dividends (typically), and no ownership whatsoever. You are simply betting on the price direction. If the price goes up $10, the broker pays you $10. If it goes down $10, you pay the broker $10. The underlying asset is just a reference point for the contract.
This abstraction is what makes CFDs so flexible—and so dangerous for those who don't understand what they're trading.
Note: CFDs are banned in the USA because regulators (SEC, CFTC) believe they are too risky for retail investors due to the leverage and conflict-of-interest issues. However, the rest of the world (UK, Europe, Australia, Asia) uses them daily. If you're in the US, you'll need to use Futures or Options instead.
1. The Superpower: Short Selling
In the traditional stock market, making money when prices crash is complicated. You have to "borrow" shares from your broker, pay borrowing fees, face short-sale restrictions, and deal with potential "short squeezes" where you're forced to cover at terrible prices.
With CFDs, Short Selling is as easy as buying. You just click the "Sell" button. Since you don't own anything anyway, "selling something you don't have" makes perfect logical sense in the CFD world. You're simply betting the price will go down instead of up.
This effectively doubles your trading opportunities. You can profit during bull markets (Buy/Long) and during bear markets (Sell/Short) with equal ease. For a trader, volatility is the product—you make money from movement, not from direction—and CFDs allow you to capture that movement in both directions with identical mechanics.
2. The Flexibility of Position Size
This is why beginners love CFDs and why they dominate the retail trading world.
In the Futures market, the minimum contract size for the E-Mini S&P 500 (ES) might represent $200,000+ of notional exposure, with tick movements worth $12.50 each. Even the "Micro" Futures (MES) represent substantial risk for small accounts.
In CFDs, you can trade Micro-Lots (0.01) or even smaller. You can trade the S&P 500 with just $10 of risk per point. This "fractionalization" allows small accounts to practice proper risk management—risking 1% per trade—without needing $50,000 in capital.
For a $1,000 account trying to risk $10 per trade, CFDs are often the only practical option. This accessibility is why they've become the default instrument for retail traders learning the craft.
3. The Hidden Costs (Spread & Swap)
CFD Brokers often advertise "Zero Commission." This is marketing. You pay in other ways.
The Spread
The difference between the Buy (Ask) and Sell (Bid) price.
If the real price is 100.00, your broker might charge you 100.02 to buy. You start every trade slightly negative (e.g., -$2.00). This is the broker's profit.
The Swap (Overnight Fee)
CFDs are a leveraged product. You are trading with borrowed money.
If you hold a position past 5 PM NY time, you pay interest on that loan. This makes CFDs terrible for long-term investing (months/years).
4. Broker Risk (B-Book)
This is controversial but necessary to understand.
In many cases, your CFD broker acts as the "Counterparty". When you buy, they sell. When you sell, they buy.
This is called the B-Book Model. It means if you lose money, the broker keeps it. This creates a potential conflict of interest.
Summary
CFDs are the perfect tool for the Retail Speculator. They offer high leverage to amplify small account gains, the ability to short-sell with a single click, and micro-sizing that allows proper risk management on accounts as small as $500. For most retail traders outside the US, CFDs are the default starting point.
However, CFDs are not for investing. The spread costs add up. The overnight swap fees compound. The broker may be trading against you. Use CFDs for short-term trading—days or weeks—not for positions you plan to hold for months or years. For long-term exposure, buy the actual asset or use ETFs.
Think of CFDs as a rental car: perfect for getting from A to B quickly, but you wouldn't want to rent a car for five years. For longer journeys, you need different transportation.