CFDs, and why regulators warn about them
A CFD is a leveraged bet on a price difference, without owning the underlying asset. Providers have to disclose what share of their retail clients loses money, and those figures regularly sit around 70 to 80 percent.
Learning objective: After this lesson, you can explain why CFDs count as a leveraged product and why regulators warn about them.
With a CFD, you don't buy anything. You enter a contract with a provider over who pays whom the price difference. That's why it's called a contract for difference.
That sounds harmless, and it isn't, because CFDs are almost always offered leveraged. So everything from the previous two lessons applies, with one twist: your counterparty is the provider itself.
The most remarkable fact sits on every CFD ad, because regulators require it. It states what share of that provider's retail customers loses money. That figure almost always sits between 70 and 80 percent.
Read that again. That's not a critical study, that's the provider's own mandatory disclosure about its own customers. No other financial product has to disclose anything like it, and for none would the number be so stark.
An example trade with made up numbers
Jonas opens a CFD on a stock index at 18,000 points. He trades €1 per point, so he moves €18,000. With 20x leverage he has to put up €900 as collateral. The spread costs him €1.20 on entry, and in this example the provider charges about €1.50 in financing every night.
If it works: After a week the index rises 300 points. Jonas is €300 ahead, and after spread and seven nights of financing about €288 is left.
If it goes wrong: The index falls 300 points, only 1.7 percent. Jonas loses €300, a third of his collateral, plus costs. If the index falls 900 points, the whole collateral is gone.
Calculations like this explain why, according to the providers' mandatory disclosures, most retail clients lose money with CFDs. More in the reality check on CFD loss rates.
CFDs are over-the-counter derivatives. Pricing comes from the provider, not a central order book, so spread, slippage, and execution quality can't be independently verified. If the provider runs a market-making model and takes the opposite side itself, a structural conflict of interest arises, since customer losses directly become its revenue.
Costs consist of the spread, financing costs on the leveraged position, and sometimes commissions. Financing costs accrue continuously and make longer holding periods systematically expensive. Together, they produce the negative expected value that explains the loss rates, without needing to assume any misconduct by customers.
Regulators in several jurisdictions have introduced leverage caps for retail clients, negative-balance protection, and mandatory disclosure of loss rates. These measures cap the maximum damage but don't change the product's structure. At its core it remains: an instrument with ongoing costs and high leverage, in an environment where the customer can't verify the pricing.
Summary
- With a CFD, you own nothing, you have a contract with the provider.
- The mandatory loss-rate disclosure comes from the provider itself.
- Ongoing financing costs make longer holding periods systematically expensive.
Did you get it?
What do you own when you buy a CFD?
Nothing. You have a contract to pay a price difference with the provider.
Where does the loss-rate figure in the advertising come from?
From the provider itself. It's a mandatory regulatory disclosure about its own retail customers.
What conflict of interest can exist?
If the provider itself holds the opposite side, customer losses become its revenue.
What others often ask about this
Why do people lose money so fast with CFDs?
Because of leverage. Even small price moves hit the collateral with full force. On top of that come the spread and costs for every night the position is open.
Can I lose more than I deposited with a CFD?
Retail clients in the EU have had negative balance protection since 2018. The money you deposited can still be lost completely.
Sources and further reading
- Mandatory disclosure of retail client loss rates under the requirements of European financial regulators. View source ↗
Check your understanding
Related
- Loss rates on CFDsReality Check
- Risk-reward ratioStage 3
- Investing and trading are two different thingsStage 1
- Matching questions for this stageQuestions