What it is, precisely
A contract for difference is an agreement between you and a broker to exchange the difference in an asset's price between opening and closing the contract. You never own the asset. There is no exchange and no clearing house — your counterparty is the broker.
It was invented in London in the 1990s as a way for institutions to get leveraged exposure without paying stamp duty, then marketed heavily to individuals.
The three costs
1. The spread — you buy at the offer and sell at the bid, paying the difference immediately on every trade.
2. Overnight financing — because the position is leveraged, you are effectively borrowing. A charge, typically a benchmark rate plus a margin of 2–3%, is applied every night a long position is held. Over months this quietly dominates the outcome.
3. Commission on share CFDs, in addition to the spread.
A position that goes nowhere for six months loses money. This is structural, not bad luck.
The disclosure that says everything
UK-authorised CFD providers must display the percentage of retail investor accounts that lose money. Those figures are published on every provider's website and sit consistently between roughly 65% and 80%.
That is the industry's own regulated disclosure about its own customers. It is worth reading it as the primary fact about the product rather than as a footnote to the marketing.
The protections that do exist
After FCA and ESMA intervention in 2018–19, UK retail clients get: leverage capped at 30:1 on major FX and lower on other assets, margin close-out at 50% of required margin, negative balance protection so you cannot owe the broker more than your account, a ban on bonus incentives, and mandatory risk warnings. Crypto CFDs are banned outright for retail.
These are real and meaningful improvements. They reduce the tail risk; they do not change the arithmetic of spread plus financing against a near-zero-sum bet.
How you would actually trade it
If you use CFDs, use an FCA-authorised firm — verify the registration number on the FCA register yourself, since clone firms using real firms' details are a persistent fraud.
Understand the overnight financing rate before holding anything for more than a few days, and size positions on the exposure, not on the margin. A £500 margin deposit controlling £15,000 of exposure is a £15,000 position.
For most people with an investment objective rather than a trading objective, buying the underlying asset inside an ISA achieves the goal without the financing drag or the leverage.
What goes wrong
- 65–80% of retail accounts lose money, per the providers' own required disclosures.
- Leverage magnifies losses at the same rate as gains, and the account close-out can crystallise a loss just before a recovery.
- Financing costs make long holding periods structurally unprofitable.
- Counterparty risk. You are exposed to the broker; segregation and FSCS coverage apply to authorised firms but administration is still disruptive.
- Clone firm fraud is common in this sector specifically.
- No shareholder rights — no dividends as such, no votes, no ownership.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.