CFDs and leverage: how small moves become large losses
A contract for difference is a contract with a provider that pays the difference in an asset’s price between when you open the position and when you close it; you never own the asset. CFDs use leverage, so gains and losses are worked out on the full position, not on the smaller amount you put down.
General information, not financial advice. Moneysmart describes CFDs as high-risk, complex and costly. Its page on contracts for difference is the official guide.
Moneysmart’s first line on CFDs is that most people lose money trading them. This page explains why, using ASIC’s figures and Moneysmart’s own examples, and sets out the limits ASIC has placed on how CFDs are sold to retail clients.
At least this share of retail investors lost money trading CFDs in 2023–24, according to ASIC research reported by Moneysmart. Moneysmart adds that most retail investors stop trading CFDs within a year.
How a CFD works
A CFD is a derivative: its value is based on an underlying asset such as shares, commodities, currencies, crypto-assets or a market index. If you buy a CFD and the price rises, you profit; if it falls, you lose. If you sell a CFD and the price falls, you profit; if it rises, you lose.
In Australia, CFDs are only available over the counter. They are not traded on a licensed exchange, so each one is a contract between you and the issuer, and every issuer has its own terms.
Leverage, in plain arithmetic
To open a position you pay a small amount, called margin, and take exposure to a much larger amount. Gains and losses are based on the full value of the position. Moneysmart’s example: put up $5,000, which is 5%, for a $100,000 position. If the underlying asset moves against you by 5%, you could lose the entire $5,000.
The same arithmetic runs through ASIC’s leverage limits. A ratio of 30:1 means a position worth up to 30 times your margin. At that limit, the margin is one-thirtieth of the position, about 3.3%, and a price move of that size against you equals the whole margin. The table works this through for each limit in ASIC’s order.
| CFDs referencing | Maximum leverage | Smallest margin | Move against you that equals the margin |
|---|---|---|---|
| An exchange rate for a major currency pair | 30:1 | 3.33% | 3.33% |
| An exchange rate for a minor currency pair, gold or a major stock market index | 20:1 | 5% | 5% |
| A commodity other than gold, or a minor stock market index | 10:1 | 10% | 10% |
| Shares or other assets | 5:1 | 20% | 20% |
| Crypto-assets | 2:1 | 50% | 50% |
In ASIC’s order, a major currency pair is any two of the Australian dollar, British pound, Canadian dollar, euro, Japanese yen, Swiss franc and US dollar; any other pair is minor.
Fees sit on top of the arithmetic. CFD trading often incurs commissions, spreads and overnight financing fees, which can reduce any profit and make losses worse. Moneysmart’s summary: generally, the more you trade, the more you lose, especially after fees.
Margin calls and close-outs
If the market goes against you, the issuer may ask you to pay extra money at short notice to keep the position open, which is a margin call, or close the position out for whatever it is worth at the time.
A trade that goes wrong
An investor expects a mining company’s share price to rise and buys a CFD, putting up $500 of her own money to open a $10,000 position. The price falls instead. Because her loss is based on the full $10,000, it mounts quickly. The provider makes a margin call; she cannot pay, and the provider closes the position. She loses her $500 and may owe further fees and charges. Moneysmart notes the example is simplified and leaves fees out.
The limits ASIC placed on CFDs
ASIC made a product intervention order on CFDs in October 2020, after reviews in 2017, 2019 and 2020 found that most retail clients lose money trading them. The order took effect on 29 March 2021. In April 2022 ASIC extended it for a further five years, to 23 May 2027. As Moneysmart summarised it in September 2026, CFD issuers must:
- apply margin close-out protection, closing one or more positions before losses pass set levels;
- give retail clients negative balance protection, so they can never lose more than the money in their CFD trading account;
- keep within leverage limits for each asset class;
- not offer incentives to trade, such as trading credits, rebates or “free” gifts.
When it extended the order, ASIC reported what it had seen in the order’s first six months: a 91% reduction in aggregate net losses by retail client accounts, from $372 million to $33 million a quarter on average, and 51% fewer loss-making retail client accounts a quarter on average.
Risks the limits do not remove
Pricing
The issuer sets the prices on its own platform and the terms for opening and closing positions. When markets move quickly, or trading is thin, the price shown when you place an order may not be the price you get.
The issuer itself
Because each CFD is a contract with the issuer, you rely on it to meet its obligations. Australian CFD issuers must hold an AFS licence and meet requirements on financial resources, risk management and client money, which reduce the risk but do not eliminate it; you may still lose money if the issuer fails.
Overseas providers
Overseas CFD providers often do not hold an Australian licence, so Australian consumer protections do not apply and you will not have access to the Australian Financial Complaints Authority (AFCA). Moneysmart says that if a provider has no licence, do not deal with it, and that it could be a scam. Page 6 shows how to check.
“Pro” accounts
Some issuers may offer a “pro account”, which can classify you as a wholesale client. A wholesale client can lose more than they invest, as they may not have negative balance or margin close-out protection, generally cannot use AFCA, may not receive a product disclosure statement or Financial Services Guide, and will not be assessed against the product’s target market.
Moneysmart’s questions
Moneysmart suggests asking yourself these before trading, in its words:
- Do I understand how CFDs work, and am I comfortable with taking that level of risk?
- Am I willing and able to lose my entire investment?
- Do I know what the fees and costs are to trade CFDs?
- Do I really have the time to be monitoring my positions regularly?
- Does the CFD provider have an Australian financial services (AFS) licence?