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CFD FAQ

Frequently asked questions about CFDs

What is a CFD, how does leverage work and what costs will you face? Here you will find the most important answers about CFD trading, explained briefly and clearly. Just click on a question to see the answer.

Basics

CFD stands for “contract for difference”. With it you trade on the price movement of a market without buying the underlying asset itself, so no real share and no real gold.

All that matters is how the price changes between opening and closing your position: if it moves in your direction, you gain the difference. If it moves against you, you lose it.

Almost all major markets: stock indices such as the DAX or Nasdaq 100, individual shares, commodities such as oil, precious metals such as gold and silver, currencies (forex) and, with some brokers, cryptocurrencies. Everything runs through a single account.

With a long position you bet on rising prices, with a short position on falling prices. This is a big difference from buying shares in the classic way: with CFDs you can trade in both directions, and just as easily.

Futures are standardised contracts that are traded on an exchange and have a fixed expiry date. CFDs are traded over the counter directly with the broker and usually have no expiry.

Another advantage of CFDs: you can also trade fractions of a contract and so control your risk more finely.

No. You only trade on the price development; the underlying asset itself does not belong to you. That is why, with share CFDs for example, you have no voting rights at the general meeting. Dividends, however, are usually taken into account through an adjustment payment.

Leverage and margin

With leverage you move a larger position than the capital you put in yourself. With leverage of 20:1, for example, a deposit of €500 is enough for a position worth €10,000.

Leverage works in both directions: gains and losses are magnified in the same proportion.

Margin is the deposit the broker blocks on your account for an open position. It is not a fee but part of your capital that is tied up during the trade. The amount depends on the leverage: the lower the leverage, the more margin you need.

The European regulator ESMA has set upper limits:

  • 30:1 for major currency pairs (e.g. EUR/USD)
  • 20:1 for other currency pairs, gold and major stock indices (e.g. DAX, Nasdaq 100)
  • 10:1 for other commodities and smaller indices
  • 5:1 for individual shares
  • 2:1 for cryptocurrencies

ESMA’s leverage limits apply to retail clients. If you are classified as a professional client, you can trade with higher leverage. You can apply to your broker for this status if you meet at least two of the following three criteria:

  • Trading experience: Over the last four quarters you have carried out an average of at least ten transactions of significant size per quarter in the relevant market.
  • Assets: Your financial portfolio of cash deposits and financial instruments exceeds €500,000.
  • Professional experience: You work or have worked for at least one year in the financial sector in a position that requires knowledge of the planned transactions.

The broker reviews your application and decides on the classification. Important: as a professional client you give up part of the protection for retail clients. This includes the leverage limits and, depending on the broker, also negative balance protection. Higher leverage magnifies gains and losses alike.

If losses make your account equity fall below the required margin, the broker warns you. That is the margin call.

For retail clients in the EU there is also the close-out rule: if your equity falls to 50 % of the required margin, the broker automatically closes positions to limit further losses.

Retail clients in the EU have negative balance protection. So you cannot lose more than the money in your trading account. You can, however, lose all the capital you have deposited. Professional clients do not always have this protection.

Costs and process

The most important costs are:

  • the spread, i.e. the difference between the buying and selling price
  • with some account types, a commission per trade
  • Financing costsif you hold positions overnight

Depending on the broker, further fees may be added, for example for inactivity or withdrawals.

The spread is the difference between the buying price (ask) and the selling price (bid). Every position therefore starts with a small loss equal to the spread.

In liquid markets such as the DAX or EUR/USD the spread is usually very tight; in quiet or volatile phases it can widen.

If you hold a CFD position beyond the close of trading, the broker charges financing because you are trading with leverage. Depending on interest rates and direction, this can be a charge or, in rare cases, a credit.

Day traders who close everything in the evening do not incur these costs.

Profit or loss = price difference × position size × point value, minus costs.

An example: you buy 1 DAX CFD at €1 per point. If the DAX rises by 50 points, your profit is €50 before costs. If it falls by 50 points, you lose €50.

CFDs usually follow the trading hours of the underlying market, often with extended hours. Many index CFDs and forex can be traded almost around the clock from Monday to Friday.

Watch out for price gaps over the weekend: on Monday the price can open quite differently from Friday.

Order types

With a market order you buy or sell immediately at the next available price. It is the fastest way to open or close a position.

The downside: you do not know the exact execution price in advance. In fast markets or around news it can differ from the displayed price. This is called slippage.

With a limit order you set the maximum price at which you want to buy or the minimum price at which you want to sell. A buy limit is placed below the current price, a sell limit above it.

The order is only executed at your limit or a better price. If the market does not reach your limit, it is not executed. Typical use: entering on a pullback to support.

A buy stop is placed above the current price, a sell stop below it. When the stop price is reached, it becomes a market order and is executed at the next available price.

You use stop orders, for example, to enter automatically on a breakout above resistance.

A stop-loss closes your position automatically when the price reaches a defined loss level. It is your most important tool for limiting the risk per trade.

Technically, a stop-loss is a stop order. With price gaps or very fast moves, execution can therefore be worse than planned. Some brokers offer a guaranteed stop-loss for a fee, which is executed exactly at the defined price.

I explain this in detail in the article The stop-loss: how it works and why it does not guarantee a price.

A take-profit closes your position automatically as soon as your price target is reached. This way you lock in profits even when you are not sitting in front of the screen.

Technically, a take-profit is a limit order: it is executed at your target price or better.

A trailing stop automatically moves your stop-loss behind the price at a fixed distance as long as the market moves in your direction. If the price turns, the stop stays where it is.

This lets you run your profits while protecting part of them. Note: if the distance is too tight, you will often be stopped out by normal fluctuations.

Safety and practice

Reputable brokers are regulated by a financial supervisory authority, for example the FMA, BaFin or CySEC. Client money must be kept separate from the company’s own assets. Depending on the country, there is also investor compensation up to a certain amount.

Always check where your broker is regulated before opening an account.

CFDs are complex products and are suitable for people who understand how leverage and margin work and can afford losses financially. You should only use money you can do without.

The majority of retail clients lose money trading CFDs. Every broker has to publish its own percentage in its risk warning.

The most important tools are a fixed stop-loss on every trade, a position size that suits your account, and a maximum risk per trade, for example 1 % of your account.

A clear trading plan is just as important, so that you do not decide on gut feeling.

Yes. Almost all brokers offer a free demo account with virtual money. There you get to know the platform, order types and your strategy without financial risk.

But bear in mind: real money feels different, and psychology plays a much bigger role in live trading.

In Austria, profits from CFDs are subject to income tax and must be declared in your tax return (form E1kv). With foreign brokers, as a rule no tax is withheld automatically, so you have to declare the income yourself.

Which tax rate applies in your case and how you can offset losses is best clarified with a tax adviser.

Note: the content is for general information only and does not constitute investment or tax advice. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.