CFD (contract for difference)

Trader's Glossary · Contracts and markets

Definition. A contract with a broker in which you settle the difference in the underlying's price between opening and closing the position, without the instrument itself ever being traded on an exchange.

How it works

The broker quotes the CFD price based on the underlying market. Your order never reaches an exchange, and in the market-maker (dealing desk) model the broker itself is often your counterparty. The cost is usually the spread, a commission and an overnight financing charge.

Example

A Dow Jones index CFD at a forex broker and the MYM contract on the CME track a similar index, but only MYM gives you access to a central order book, real volume and a record of every trade with the aggressor side.

What to watch out for

According to ESMA, most retail clients lose money on CFDs. CFDs are unsuitable for learning order flow, because they contain no data on the whole market's order flow.

See also

Futures contract, CME Globex, Spread, Margin and leverage.

More in Hetman Capital Club

Full article in the Club (in Polish): 🏛️ Exchange or broker: CME futures vs CFDs and forex with a market maker.

You'll find the full explanation with graphics, examples and exercises in the 🖥️ Order flow atlas space, and its use in the live market in the 🔴 Live Room. Both are available to Club members (in Polish).

Educational content, not investment advice.