A CFD (contract for difference) is an agreement between a trader and a broker to exchange the difference between the price of an asset when a position is opened and its price when the position is closed. You do not buy the asset itself (a currency, a share, gold or an index); you trade on the change in its price. If the price moves in the direction you chose, the broker pays you the difference; if it moves against you, you pay the difference to the broker. CFDs are traded on margin, so a deposit that is a fraction of the position's full value controls the whole position, which is why both gains and losses are magnified.
How a CFD works, step by step
- You choose an instrument and a direction. You can open a long position (you expect the price to rise) or a short position (you expect it to fall). Shorting a CFD needs no borrowing of the underlying asset, which is one reason CFDs are used to trade falling markets as well as rising ones.
- You choose a position size. CFDs are quoted in lots. On forex, one standard lot is 100,000 units of the base currency; on shares and indices, one CFD usually corresponds to one share or one index point. The full value of the position is its notional value: position size multiplied by the price.
- You deposit margin, not the full value. The broker blocks a margin, a percentage of the notional value, from your account balance. For retail clients in the EU the percentage is fixed by regulation (see the section on leverage below).
- The position is marked to market. While the position is open, its unrealised profit or loss changes with every price tick and is reflected in your account equity.
- You close the position. The difference between the opening and closing price, multiplied by the position size, is credited to or debited from your account. Overnight financing (swap) is added or deducted for every day the position was held.
A worked example
ABF Trade's contract specifications give a margin example for the most traded currency pair: to open 1.00 lot of EUR/USD (100,000 EUR) with 30:1 leverage, the margin required is 100,000 EUR / 30 = 3,333.33 EUR. On EUR/USD, a move of one pip (0.0001) on one lot is worth 10 USD. If the price moves 50 pips in your favour, the open profit is 500 USD; if it moves 50 pips against you, the open loss is 500 USD. In both cases the price moved only half a cent. Against a margin of roughly 3,300 EUR, though, the change amounts to about 14% of the money you put up. Spread, commission (on account types that charge one) and overnight swaps are on top of this.
The same logic applies to a share CFD. Suppose you buy 100 CFDs on a share priced at 50 EUR: the notional value is 5,000 EUR. At the 5:1 leverage limit that ESMA sets for share CFDs, the margin is 20%, or 1,000 EUR. If the share rises 2% to 51 EUR, the position shows +100 EUR; if it falls 2% to 49 EUR, it shows −100 EUR. A 2% move in the share is a 10% move in the margin you deposited.
Long and short
A CFD position can be opened in either direction. Buying (going long) means you gain if the price rises and lose if it falls. Selling (going short) is the mirror image: you gain if the price falls and lose if it rises. For share CFDs this matters in one more way: holders of long positions receive a dividend adjustment when the underlying company pays a dividend, while holders of short positions are charged it, so that the position reflects the economic effect of the dividend on both sides.
Leverage and margin
Leverage is the ratio between the notional value of a position and the margin you deposit. 30:1 leverage means a 3.33% margin; 20:1 means 5%; 10:1 means 10%; 5:1 means 20%.
For retail clients in the European Union, the maximum leverage on CFDs is capped by the European Securities and Markets Authority (ESMA). The caps depend on the volatility of the underlying asset: 30:1 for major currency pairs, 20:1 for non-major currency pairs, gold and major stock indices, 10:1 for commodities other than gold and for non-major indices, 5:1 for individual shares, and 2:1 for cryptocurrencies. These limits were introduced across the EU in 2018 and later adopted permanently by national regulators, including CySEC in Cyprus, which supervises ABF Trade EU Limited.
ABF Trade applies these limits to retail clients: 3.33% margin (30:1) on FX majors, 5% (20:1) on FX minors, gold and indices, and 10% (10:1) on commodities. The margin for any specific symbol is listed in the contract specifications.
Two account levels decide what happens when a position moves against you. When your equity falls to 100% of the margin used, the account reaches the margin call level, a warning that no further positions can be opened. If equity falls to 50% of the margin used, the stop-out level is reached and the platform starts closing positions automatically, beginning with the largest loss. This 50% margin close-out rule is also part of the ESMA measures and applies to every retail CFD account in the EU.
What CFD trading costs
- Spread. The difference between the buy (ask) and sell (bid) price is the main cost of a CFD trade. At ABF Trade the minimum spread depends on the account type: from 1.5 pips on a Start account, from 1.0 pip on Standard and from 0.2 pips on Premium.
- Commission. Start and Standard accounts charge no commission. The Premium account charges 10 USD per round-turn lot on top of the tighter spread.
- Overnight financing (swap). For every night a position is held, a swap is credited or charged, depending on the instrument and direction. The platform does not charge swaps on Saturday and Sunday nights; instead, the daily swap is applied three times on one specific weekday, shown in each instrument's specification. Swap rates are updated daily.
- Dividend adjustments on share CFDs, as described above.
Because swaps accrue daily, a CFD held for weeks or months costs more than the same exposure held for an hour. CFDs are generally designed for short- to medium-term trading rather than long-term investing.
CFD versus owning the asset
| CFD | Buying the asset | |
|---|---|---|
| Ownership | No — you hold a contract with the broker | Yes — shares are registered to you, currency sits in your account |
| Voting rights (shares) | None | Yes |
| Dividends (shares) | Cash adjustment: credited on long positions, charged on short positions | Paid to the shareholder |
| Falling markets | Can be traded directly by going short | Requires borrowing shares or using derivatives |
| Capital needed | Margin of 3.33%–20% of the position value for retail clients | Full value of the position |
| Holding cost | Daily overnight swap | Usually none for shares; custody fees at some brokers |
| Loss potential | Can exceed the margin deposited, up to the account balance; retail accounts have negative balance protection | Limited to the amount invested |
ABF Trade's own shares page states it directly: all shares offered on the platform are CFDs, so clients holding share positions do not own the underlying shares and have no voting rights.
What you can trade as a CFD
At ABF Trade, CFDs are available on five asset classes through the MetaTrader 5 platform: forex (currency pairs), precious metals (gold and silver), equity indices, commodities and shares of listed companies. Each instrument has its own contract size, minimum order size, margin requirement, swap rates and trading hours, all listed in the contract specifications.
The risks — and the protections
CFDs are complex instruments and carry a high risk of losing money quickly because of leverage. ABF Trade's own figure, published on every page of the site, is that 66.7% of retail investor accounts lose money when trading CFDs with the provider. The main reasons are the ones shown in the examples above: a small move in the underlying price is a large move relative to the margin, and costs accrue daily.
EU rules give retail clients several protections, and it is worth knowing what they do and do not cover:
- Negative balance protection. A retail client's loss on CFDs cannot exceed the money in the account. ABF Trade offers it to all retail clients; it is not offered to clients categorised as professional.
- Margin close-out at 50%, described above, limits how far an account can fall before positions are closed.
- Segregated client funds. Client money is held in bank accounts separate from the company's own funds, with European credit institutions.
- Investor Compensation Fund. As a Cyprus Investment Firm, ABF Trade EU Limited is a member of the ICF, which covers retail clients in specific cases such as the firm's insolvency. It does not cover trading losses.
- Regulation. ABF Trade EU Limited is authorised and regulated by the Cyprus Securities and Exchange Commission under licence number 171/12 and operates in the EU under MiFID II.
None of these protections changes the arithmetic of leverage. Before trading CFDs you should consider whether you understand how they work and whether you can afford to take the high risk of losing your money.
Is CFD trading right for you?
CFDs suit traders who want to take short- or medium-term positions on price movements, in either direction, across several markets from one account, and who understand margin and are prepared for the possibility of losing the money deposited. They are not a substitute for long-term investing in shares or funds, and they are not suitable for everyone.
A practical first step is a demo account: ABF Trade's demo uses the same price feed, spreads and trading conditions as a live account, does not expire, and lets you practise placing orders and managing margin without risking money. Registration is required to open one.
Frequently asked questions
Do I own the asset when I trade a CFD?
No. A CFD is a contract with the broker that tracks the price of the asset. You have no ownership of the underlying shares, currency or commodity and, for share CFDs, no voting rights.
What is the difference between a CFD and buying shares?
When you buy shares you own them, can vote and receive dividends, and your loss is limited to what you paid. With a share CFD you trade on margin, can go short, receive or pay a dividend adjustment instead of a dividend, pay an overnight swap for each day held, and can lose more than the margin you deposited — up to your account balance for retail clients.
How long can I hold a CFD position?
CFDs on forex, metals, indices and shares at ABF Trade have no fixed expiry date: a position stays open until you close it or until it is closed at the stop-out level. An overnight swap is applied for every day it stays open, so the cost of holding grows with time.
Is CFD trading regulated in the EU?
Yes. CFDs are regulated under MiFID II, and ESMA's product intervention measures set the retail leverage caps, the 50% margin close-out rule, negative balance protection and the mandatory risk warning. National regulators enforce them; ABF Trade EU Limited is supervised by CySEC, licence 171/12.
Why is leverage limited?
Because leverage magnifies losses as much as gains. ESMA set the caps by asset class after finding that most retail CFD accounts lost money; lower leverage on more volatile assets reduces how fast an account can be wiped out.
Are profits from CFDs taxed?
Tax treatment depends on your country of residence and your personal circumstances. This article is not tax advice; ABF Trade does not provide tax advice, so consult a tax adviser in your country.
Can I try CFD trading without risking money?
Yes. A demo account at ABF Trade has the same price feed, spreads and trading conditions as a live account and does not expire.
Sources
- ABF Trade — Contract Specifications: margin example for EUR/USD, retail leverage 1:30 on FX majors and 1:20 on FX minors under ESMA/MiFID II, swap rules — https://abftrade.com/eu/en/trading/contract-specifications
- ABF Trade — Trading Accounts: margin call level 100%, stop-out level 50%, negative balance protection for retail clients, segregated bank accounts, spreads and commissions by account type — https://abftrade.com/eu/en/accounts
- ABF Trade — Professional Clients: margin requirements for retail clients by asset class — https://abftrade.com/eu/en/accounts/professional-clients
- ABF Trade — Shares: share CFDs confer no ownership or voting rights; dividend adjustments — https://abftrade.com/eu/en/trading/shares
- ABF Trade — Safety of Funds: segregated accounts, Investor Compensation Fund — https://abftrade.com/eu/en/about/safety-of-funds
- ABF Trade — Demo Account — https://abftrade.com/eu/en/accounts/demo
- ESMA — product intervention measures on CFDs for retail clients (leverage limits, margin close-out, negative balance protection, risk warning), 2018 — https://www.esma.europa.eu/press-news/esma-news/esma-agrees-prohibit-binary-options-and-restrict-cfds-protect-retail-investors
- CySEC — register of Cypriot Investment Firms — https://www.cysec.gov.cy/en-GB/entities/investment-firms/cypriot/
Related reading in the Learning Centre: What is Forex, Margin Call, Negative Balance Protection, Notional Value, Short Selling, Bid and Ask Price, FX Swap.
66.7% of retail investor accounts lose money when trading CFDs with this provider. Assess if you're comfortable with this level of risk.
