If you’re a global investor or international trader, you may have heard of contracts for difference (CFD) trading. CFDs exist across most of the world and are especially popular in Europe and Australia — but retail access is restricted in a few places, most notably the United States and Hong Kong.
What is a CFD?
A contract for difference is an agreement based on an underlying asset or financial instrument, such as a stock, commodity or currency pair. The buyer of the contract believes the underlying asset will increase in value from the time the contract is initially opened to when it is closed, while the seller of the contract believes the underlying asset will decrease in value.
At no point do the contract buyers own or have an obligation to own the underlying asset itself, nor are they trading the underlying asset. Because they’re only trading a contract, CFD traders can profit regardless of whether prices are going up or down. For that reason, CFD trading often becomes more popular during times of market volatility, as traders seek to profit by “shorting” the market when it falls.
While CFDs can be profitable, they’re also highly risky, complex products that are suited to more experienced traders.
Why are CFDs illegal in the US?
There are CFDs on US stocks and US stock market indices, but US residents generally can’t open a CFD trading account.
The reason traces back to the 2008 financial crisis. In response, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which brought derivatives like CFDs under federal oversight.(1) Under those rules, CFDs can be classified as swaps or security-based swaps — and selling them to everyday investors is only allowed if the trades happen on a registered US exchange. Since almost every CFD in the world is traded over-the-counter between a broker and a client, that requirement effectively shuts retail CFD trading out of the US market. The SEC and CFTC enforce these rules.
What are the risks?
CFDs are extremely risky products for the following reasons:
Leveraged: Traders are only required to contribute a small portion of the money involved in each trade and can borrow the rest from the trading platform — sometimes as much as 30 times the amount invested. Borrowing money to invest is always a risky move.
Unlimited: You can lose more money than you initially invest. Unlike most other investments, you can lose much more money than you started with, meaning you actually owe the CFD provider money.
No collateral: You don’t own the underlying asset. All you own is the contract between you and the CFD provider. Therefore, you can’t benefit from the capital growth of the underlying asset over the long term.
Volatile: Just like their underlying assets, CFDs are affected by market conditions and can swing wildly back and forth without notice in volatile markets.
Illiquid: Depending on the trading volume of the CFD, there may not be a buyer or seller available when you want to close out your position.
Can I trade CFDs in overseas markets?
US regulators prohibit US residents from trading retail CFDs anywhere in the world — not just at home. That’s why most foreign CFD providers won’t even let a US resident open an account. Dual citizens may be able to open a CFD account if they’re not living in the US. And if a foreign provider did allow a US resident to open a CFD account, it would likely not be regulated in its home country, adding further risks to trading activity.
Alternatives to CFDs
There’s no legal investment that operates just like CFDs in the US, but there are some that have elements in common:
Leveraged ETFs
Some exchange-traded funds (ETFs) utilize riskier derivatives in order to multiply gains or losses in select stock indices and commodities. You can buy or sell these in a normal brokerage account without risking any more than you invest and without owning or being obligated to own the underlying asset. Leveraged ETFs are designed for short-term trades, not buy-and-hold investing. They’re regulated by the SEC just like stocks and bonds.
Options
These are also leveraged to multiply the moves of an underlying stock, stock market index or commodity, and there’s no collateral needed if you’re a buyer of a call or put option and you don’t exercise it. Plus, you can’t lose more money than you invest and options are accessible in most mainstream stock trading platforms. Like stocks and commodities, options are regulated by the SEC, FINRA and/or CFTC.
Who is most likely to be researching CFD trading?
Finder data suggests that men aged 35-44 are most likely to be researching this topic.
Response
Male (%)
Female (%)
65+
3.03%
55-64
8.54%
4.41%
45-54
12.26%
3.17%
35-44
20.52%
3.86%
25-34
19.28%
4.41%
18-24
17.36%
3.17%
Source: Finder sample of 726 visitors using demographics data from Google Analytics
Binary options
A lesser-known cousin to regular options, binary options — like CFDs — are a derivative investment that never owns or has an obligation to own the underlying asset. They’re a yes-or-no contract based on the price movement of the underlying asset within a limited timeframe, and they typically operate on a scale of $0 to $100.
For example, say you buy a binary option on gold for the current week at the strike price of $1,700. If the current price is just below $1,700, you might be able to buy the binary option for $50, and if gold ends the week above $1,700, you receive $100 back; if gold ends the week below $1,700, you get nothing. You can also sell to close the binary option at the market price. Nadex is the only US-regulated exchange that allows binary options trading, so you’d have to open an account there. It’s focused on currencies, commodities and a few global stock indices.
Futures contracts
Futures also use a lot of leverage, and you can lose more money than you put in. The technical difference from CFDs is that a futures contract is an agreement to buy or sell the underlying asset on a set delivery date. In practice, though, most retail traders close their positions before that date ever arrives, and many of the most popular contracts — like the E-mini S&P 500 — are cash-settled, meaning no physical asset ever changes hands.(2) Futures are regulated by the CFTC and trade through specialized brokerage accounts, and not every mainstream platform supports them.
Forex
Like CFDs and futures, the foreign exchange market involves substantial leverage, and you can lose more money than you invest. Forex trading can involve the underlying currencies — as in forex forwards and futures — but there are also spot forex derivatives that don’t involve any collateral. It’s an over-the-counter investment, but it’s supervised by the NFA and CFTC.
Compare stock trading platforms
While CFDs are illegal in the US, you can still trade other investments, like stocks, ETFs, options and futures. Compare platforms to find one that offers the investments you’re interested in.
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CFDs are popular and flexible in much of the world, but post-2008 financial reforms effectively closed the door on retail CFD trading in the US. Americans can’t access them through normal channels — but there are still plenty of ways to play price movements and manage risk with regulated alternatives.
When you trade CFDs, you never own the actual underlying asset. Instead, you bet on its price movements. In short, what you actually purchase is a contract. When you invest in stocks, however, you buy and sell the shares themselves.
When you buy stock in a company, you are usually entitled to dividends. And although trading CFDs means you never actually purchase the stock, you can still take advantage of some of the benefits of ownership.
When you buy a CFD, your trading account will be credited with a certain amount of money that reflects the dividend amount an ordinary shareholder would receive. When you sell a CFD, your account will be debited a similar amount which will be paid to the counterparty.
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Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
Belinda Punshon worked for Finder as a writer on home loans and property and as a corporate communications executive. She has a Masters in Advertising, Public Relations and Journalism from the University of New South Wales and a Bachelors in Business from the University of Technology Sydney.
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Ryan Brinks is a former editor and publisher at Finder, specializing in investments. He holds a journalism degree from University of Wisconsin–River Falls.
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