CFD trading: where the costs really come from and why most people lose

A contract for difference is an agreement between you and the broker to exchange the price difference in an underlying between opening and closing. You do not buy the share, the index or the currency pair. No voting rights, no custody, no ownership. Instead of a dividend you receive or pay a cash adjustment.

Two consequences follow that the marketing rarely spells out. First, the price you trade at is the broker's price, not an order book's. Second, your counterparty is the broker. If it fails you are a creditor, not the owner of a security. That makes the question of which legal entity you signed with far more important than it is on a plain custody account.

Let us put numbers on it. One standard lot of EUR/USD is 100,000 units, so one pip (0.0001) is worth USD 10. At a 0.9-pip spread, a complete open-and-close round trip costs USD 9.

That sounds trivial. At EUR/USD 1.1000 the position has a notional value of USD 110,000. At the European retail leverage cap of 30:1 you post roughly USD 3,667 in margin. So the spread alone is 0.25% of the capital you committed, before the price has moved at all.

Now scale it. Four round trips a day across 250 trading days is 1,000 round trips a year. A thousand times 0.25% is 250% of your margin, in spread alone. That is not an argument against trading. It is the explanation for why active leveraged accounts so rarely survive: the strategy has to out-earn that headwind before it earns anything for you.

If you hold EUR 120,000 of index exposure against EUR 6,000 of margin, somebody is funding the difference. The broker is, and it charges for that. The mechanism is the same everywhere: a benchmark rate for the relevant currency (the euro short-term rate for EUR, SOFR for USD, SONIA for GBP, SARON for CHF) plus a markup on long positions, minus the same markup on shorts. When the benchmark sits below the markup, both sides pay.

A worked example with the assumptions stated. You trade a German blue-chip index CFD at EUR 5 per point with the index at 24,000, so EUR 120,000 notional. Major indices carry a 20:1 retail cap, making the margin EUR 6,000. Say the spread is 1.2 points, or EUR 6 for the round trip. Assume your broker charges 5.0% a year in total on the long side, that is benchmark plus markup. You have to read your own provider's charges page for the markup, because it varies a great deal. On a 360-day count that works out at 120,000 × 0.05 ÷ 360 = EUR 16.67 a night.

The message is in the last column. For an intraday trade, financing is irrelevant; for a quarter-long position it is by far the largest cost. Expressing a three-month view on an index through a CFD costs roughly 17% of your margin in interest. A cash ETF on the same index costs a small fraction of that over the same period — but you need the full capital.

Two details catch people out. The day count is not standard, and 360 days versus 365 changes the financing bill by about 1.4% at a 5% rate. And most brokers charge financing on the full notional, not on the portion actually borrowed.

If your account is denominated in euros and you trade a dollar-denominated CFD, every realised position gets converted. European providers' markups run from about 0.25% at the cheap end to well over 1.5% at the expensive end.

Concretely: close 200 positions in a year with an average absolute result of USD 500 and USD 100,000 passes through conversion. At 1.0% that is USD 1,000 a year; at 0.25% it is USD 250. Same trades, same strategy, USD 750 of difference created entirely by an account setting.

The fix is usually mundane. Many brokers offer sub-accounts in several currencies. If you mostly trade dollar instruments, hold the trading account in dollars and convert only when you withdraw. Check this before you open the account — it is often not changeable afterwards.

A stop-loss is an instruction to close at the next available price, not a guarantee of a particular price. Across weekend gaps, around scheduled data releases and in thin conditions, the fill is often materially worse than the level you set.

Run the leverage against it. At 20:1, every 1% move in the underlying is a 20% move in your margin. An opening gap of 2.5% against you wipes out half your posted margin — which is precisely the level at which an EU broker is required to close you out.

Guaranteed stops exist at some providers for a premium, often charged only if the stop is actually triggered. It is one of the few extra fees genuinely worth considering if you hold overnight or over a weekend.

The European retail caps come from ESMA's 2018 product intervention measures and have since been made permanent by national regulators — in Germany through a general administrative act from BaFin, in the UK through the FCA's PS19/18.

In the UK the crypto position is more clear-cut still: the FCA banned the sale of crypto derivatives and crypto ETNs to retail consumers with effect from 6 January 2021.

Alongside the leverage caps, the package includes margin close-out at 50% of the minimum required margin on a per-account basis, negative balance protection per account, a ban on trading incentives such as deposit bonuses, and the standardised risk warning carrying the firm's own loss percentage.

What the rules do not do is make losses less likely. They cap how bad the worst case gets. And they depend entirely on which legal entity you contracted with. The same brand frequently operates an EU entity, a UK entity and an offshore entity offering far higher leverage without the European obligations. What matters is the name on your account statement, not the one on the marketing site.

Switzerland has no ESMA-equivalent retail leverage cap. Swiss residents who sign with an EU or UK entity get that entity's limits; those trading through a FINMA-supervised bank or securities firm sit inside the Swiss framework instead. Establish which applies before you fund the account.

One more thing that is routinely misread: compensation schemes cover the failure of the provider, not your trading losses. The UK's FSCS pays up to GBP 85,000 per person per firm and explicitly excludes claims for poor investment performance. German and Cypriot schemes for investment firms have materially lower limits; check the current amount on the relevant scheme's own site.

Germany. CFDs count as forward transactions (Termingeschäfte). Gains are taxed at 25% withholding plus the 5.5% solidarity surcharge — 26.375% in total — plus church tax where it applies. The annual saver's allowance is EUR 1,000, or EUR 2,000 for jointly assessed couples. Anyone remembering the older rule should note that the loss-offset restriction for forward transactions, with its EUR 20,000 ceiling, no longer appears in the current text of section 20(6) of the Income Tax Act. The ring-fencing of losses from share disposals does remain. Foreign brokers do not withhold German tax; the income belongs on Anlage KAP.

Switzerland. Private capital gains on movable assets are generally tax-free, but that is not automatic. The federal tax administration's circular on commercial securities dealing weighs, among other things, holding periods, turnover relative to portfolio size, the share of income the gains represent, debt financing, and whether derivatives are used for anything beyond hedging your own positions. Active CFD trading touches several of those at once. If the amounts are meaningful, settle it in advance with your cantonal tax office or an adviser, and check the current version on the federal tax administration's site.

Austria and the UK. In Austria, income from derivatives falls under a special capital-income rate rather than the progressive scale; verify the rate currently in force with the finance ministry. In the UK, CFD gains are within the scope of capital gains tax, while spread betting is treated differently for UK taxpayers — a treatment that depends on personal circumstances and can change.

The honest answer is: in a few well-defined cases.

• Short exposure without a stock borrow. You want to be short an index or a share for a fortnight. Through a cash account that is often simply not available to retail clients.
• Short-dated hedging. Covering an existing equity portfolio through an event costs a few nights of financing rather than a sale that crystallises tax.
• Market access. Commodities, niche indices or exotic currency pairs your cash broker does not carry.
• Granular sizing. Fractions of a contract let the risk fit the account rather than the other way round.

And the case where the cheap-looking option is the wrong one: for a long position in a broad index held over months or years, the CFD is almost always more expensive than the ETF. Financing accrues every night, the close-out rule can eject you from a correct view at the worst possible moment, and you own nothing at the end. The apparent advantage — tying up little capital — is more than consumed by the financing markup over time.

1. 1Convert the spread on your most-traded instrument into a percentage of your margin. That single number tells you more than any fee table.
2. 2Find your broker's financing page and write down the markup over the benchmark, separately for long and short.
3. 3Multiply the nightly cost by your typical holding period and compare it with the spread. If financing is the bigger number, a CFD is probably the wrong instrument for that trade.
4. 4Check your conversion markup and, where possible, open a sub-account in the currency you mostly trade.
5. 5Read the legal entity on your account statement, then look up its regulator, leverage limits and compensation scheme.
6. 6Before every position, work out what a 2% to 3% weekend gap would do to the account. If the answer is uncomfortable, the position is too large.
7. 7Settle the tax treatment for your country of residence before you open the first position, not the following spring.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

This guide is information, not investment advice. Figures, fees and regulatory requirements change; always check the current position with the provider and with the relevant supervisory authority.