A contract for difference is an agreement to exchange the change in an asset's price without ever owning the asset. It is the mechanism behind most retail forex, index and commodity trading, and understanding it explains most of what otherwise looks like arbitrary broker behaviour.
Because you never take delivery, you can go short as easily as long, and you post only a fraction of the position's value as margin. That leverage is the entire appeal and the entire risk: it multiplies the outcome in both directions, and the published statistics on retail losses are not marketing caution, they are the actual numbers.
What it costs
Three costs, always: the spread when you open, financing for every night you hold, and any commission your account type charges. The financing is the one that turns a good short-term idea into a losing long-term position, and it is charged on the full position size, not on your margin.
What to watch for
- Every regulated broker publishes the percentage of retail accounts that lose money. It is typically between 65% and 85%. Read it before the marketing.
- Margin close-out means positions can be liquidated automatically at the worst possible moment.
- Leverage available to you depends on the entity you sign with, and offshore entities offer more precisely because they owe you less.
What separates a good broker here
- Negative balance protection, stated for your entity
- The margin close-out level, as a percentage
- Financing rates published as a formula, not "market rate plus a markup"
- The broker's own loss-percentage disclosure, which is a legal requirement worth reading
