CFDs make small positions on large instruments possible and allow shorting as easily as buying. The cost is that your counterparty is the broker, not an exchange, so execution quality, overnight financing and the broker's own solvency all matter.
Regulators in several jurisdictions cap retail CFD leverage and require negative balance protection, precisely because the product is so often sold badly. CFDs are banned for retail clients in the United States.
The mistake it causes: assuming a CFD on gold is the same as owning gold. It is a contract with a company, with financing attached.
A contract, not an asset
A contract for difference pays the change in a price without you ever owning the underlying. That is how most retail brokers offer forex, gold, indices and single stocks: you are not buying gold, you are entering an agreement with the broker about what gold does.
| CFD | Owning the asset |
|---|
| Ownership | None | Yes |
| Counterparty | The broker | None or an exchange |
| Short selling | Easy | Hard or impossible |
| Overnight cost | Financing charged | None |
| Small positions | Yes | Often not |
The counterparty question
Because your counterparty is the broker rather than an exchange, execution quality, financing terms and the broker's own solvency all matter directly. This is not inherently wrong, and it is why regulation and segregated funds carry more weight here than in exchange-traded markets.
Why regulators treat it as high risk
Retail CFD leverage is capped in the EU, UK and Australia, negative balance protection is mandatory in those jurisdictions, and brokers must publish the percentage of retail accounts that lose money. That figure is typically between 70% and 80%. CFDs are banned outright for US retail clients.
What CFDs are genuinely good for
Taking a small, defined position on a large instrument, and shorting without borrowing. Those are real advantages for a retail account. The cost is financing on every overnight hold and a counterparty relationship that only matters when something goes wrong, which is exactly when it matters most.
What to do with this
- Know that a CFD on gold is a contract with a company, not gold.
- Check financing rates before holding for more than a day or two.
- Confirm which entity holds your account and whether negative balance protection applies to it.
