CFDs explained
Contracts for difference: what you own, what you pay and why you can go short.
A contract for difference (CFD) is an agreement to exchange the difference in an instrument's price between the moment a position opens and the moment it closes. You never own the underlying asset. You own exposure to its price.
How it works
You buy 10 CFDs on the US500 index at 5,800 and close at 5,850. The difference is 50 points × 10 = 500, your gross profit. If the index had fallen to 5,750, you would have lost the same amount.
Because nothing is delivered, selling first is as easy as buying first. That is why short selling, which is complicated with real shares, is a single click with CFDs.
The costs
| Cost | When | How it works |
|---|---|---|
| Spread | Every trade | You buy at the ask and sell at the bid |
| Commission | Some instruments | A fixed amount per lot, round trip |
| Swap | Positions held past the daily rollover | Overnight financing, charged or paid |
Swaps exist because a leveraged position is economically similar to borrowing one asset to hold another. On Wednesday night the swap is triple, covering the weekend.
Why prop firms use CFDs
CFDs let one account trade currencies, metals, indices, shares and crypto with the same mechanics, in small sizes, long or short. That makes them ideal for evaluating a trader's skill across markets.
A note on risk
Leverage makes CFDs powerful and dangerous. A move of 1% against a position that uses 1:100 leverage can wipe out the margin behind it. On an evaluation account the loss limits protect you from the worst, but your position size is what really decides how much each move costs.
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