A Contract for Difference is exactly what the name says: an agreement to exchange the difference between an instrument’s price when a position opens and its price when it closes. If the difference is in your favour, you receive it; if not, you pay it. At no point do you own the thing being priced.
That one design choice — price exposure without ownership — produces everything else about the product, good and bad.
The mechanics in one example
Gold trades at 2,400. You believe it will rise, and buy a CFD covering 10 ounces.
- Gold rises to 2,430: the difference is 30 × 10 = 300 in your favour, minus costs.
- Gold falls to 2,370: the difference is 30 × 10 = 300 against you, plus costs.
No vault, no delivery, no ownership — a price bet, settled in cash, in either direction. That last part matters: because nothing is owned, selling first and buying back later (going short) is exactly as easy as buying first, which is a genuine structural difference from most ways of accessing markets.
Where leverage enters
CFDs are margined products. To hold that 10-ounce gold exposure — 24,000 of notional value — the platform requires only a fraction as collateral. The fraction is set by the margin requirement; the multiple it implies is the leverage.
What leverage does not do is change the size of the bet. The position’s profit and loss is calculated on the full 24,000 of exposure whether the margin posted was large or small. Leverage decides how much of your money is reserved, not how much is at risk — a distinction covered properly in Leverage, margin and why position sizing comes first, which is the article to read immediately after this one.
What CFD trading costs
Three costs, one of which is routinely underestimated:
- The spread — the gap between buy and sell prices, paid on entry
- Commission — an explicit per-lot charge on some account types
- Swap — nightly financing on positions held past rollover, which on multi-week holds usually exceeds the spread many times over
The full breakdown, with worked numbers, is in Spreads, swaps and the real cost of holding a position.
The risks, stated plainly
Leverage cuts both ways. Losses are computed on the full exposure. An adverse move of a few percent on a heavily leveraged position can consume the margin supporting it.
Fast markets move past orders. A stop-loss executes at the next available price — across a gap or in thin liquidity, that can be meaningfully worse than the stop level. See stop placement and weekend gaps.
Margin can be called. If equity falls relative to margin in use, positions can be reduced or closed by the platform — on InnoMP, forced liquidation begins at a 30% margin level during the week and 100% over the weekend. Understanding margin calls and stop-outs before meeting one is strongly recommended.
Holding costs accumulate. Financing is charged nightly, profit or not.
CFDs are speculative instruments carrying a high degree of risk, and they are not suitable for everyone. Nothing here is a recommendation to trade them — it is an explanation of how they work, which is the minimum owed to anyone deciding.
Where to go from here
The sequence that serves beginners best: what a pip is for the units, position sizing for the survival arithmetic, trading costs for the bill, and a demo account used properly for practice at zero tuition. The markets will still be there when the fundamentals are in place — they always are.