Contracts for Difference (CFDs) have become increasingly popular in online trading, offered by numerous brokers worldwide. But what exactly are CFDs, and why do we at Neobanque believe they pose significant risks to investors? This comprehensive guide explains CFD trading, examines major CFD brokers, and reveals why we've chosen a different path focused on genuine asset ownership and investor protection.
What Are CFDs? The Complete Picture
A Contract for Difference (CFD) is a financial derivative that allows you to speculate on price movements of assets like stocks, commodities, currencies, or indices without actually owning the underlying asset. When you trade a CFD, you're entering into an agreement with your broker to exchange the difference in an asset's price between when you open and close the contract.
How CFDs Work
Let's say Apple stock is trading at $150. With a CFD:
- You "buy" a CFD representing 100 Apple shares
- You put down a margin deposit (say 10% = $1,500)
- If Apple rises to $160, you profit $1,000 (the difference)
- If Apple falls to $140, you lose $1,000
- You never actually own Apple shares
The fundamental issue: You don't own anything real.
Major CFD Brokers in the Market
The CFD industry includes various types of providers:
Pure CFD Brokers
- XTB: Major European CFD provider offering leveraged trading
- Pepperstone: Australian-based broker focusing on forex and CFD trading
- Plus500: Popular retail CFD platform with aggressive marketing
- eToro: Social trading platform offering CFDs alongside copy trading
Mixed Service Providers
- Saxo Bank: Traditional bank offering both real securities and CFD trading
- Swissquote: Swiss bank providing actual securities alongside CFD products
- ING: While primarily a traditional bank, ING offers CFD trading in some markets
- Interactive Brokers: Offers both real securities and CFD products
The Dual Model Problem
Brokers offering both real securities and CFDs create potential conflicts of interest. They profit more from CFD spreads and losses than from actual securities trading, creating incentives to promote the more profitable (and riskier) CFD products to clients.
The Critical Issue: No True Ownership
When you buy a CFD on Apple stock, you don't own Apple shares. You have a contract with your CFD provider. This fundamental difference has serious implications, especially during financial crises.
What Happens During Bankruptcy
Here's where CFDs become particularly dangerous for investors:
With CFDs:
- Your positions are liquidated immediately
- You become an unsecured creditor of the broker
- Your "investments" are part of the broker's cash pool
- Recovery depends on the broker's remaining assets after paying secured creditors
- You could lose everything, even if the underlying asset performed well
With actual stocks and bonds:
- Your securities are held separately from the broker's assets (asset segregation)
- You maintain ownership even if the broker fails
- Securities are returned to you, not liquidated
- Your investments are protected regardless of the broker's financial health
Switzerland's Gold Standard for Investor Protection
Switzerland exemplifies how proper investor protection should work. Since January 1, 2023, Swiss regulations ensure that all securities held at banks are segregated and not included in the bank's balance sheet, meaning that in the event of bankruptcy, investor securities are not considered part of the bankruptcy estate and are returned in full to the investor.
In Switzerland, FINMA (the financial supervisory authority) requires banks to use asset segregation, meaning bank assets are held entirely separate from clients' assets, with the bank acting only as a custodian.
This means when you own actual stocks or bonds through a Swiss-regulated institution:
- Your assets are legally yours, not the bank's
- Bankruptcy protection is automatic
- Recovery is complete and fast
- No complex creditor proceedings
Global Regulatory Warnings and Interventions
Financial regulators worldwide have implemented strict measures and warnings about CFDs due to widespread investor losses:
European Union - ESMA Restrictions
In 2018, the European Securities and Markets Authority (ESMA) introduced comprehensive CFD restrictions after observing massive retail investor losses:
- Leverage caps: Maximum 30:1 for major currency pairs, lower for other assets
- Margin close-out protection: Positions must be closed before losing 50% of margin
- Negative balance protection: Clients cannot lose more than their initial deposit
- Standardized risk warnings: "81% of retail CFD accounts lose money" (typical warning)
United Kingdom - FCA Actions
The Financial Conduct Authority has taken enforcement action against unlawful CFD promotions and continues monitoring the sector closely due to consumer harm.
Australia - ASIC Product Intervention
Australian Securities and Investments Commission implemented strict CFD rules including:
- Leverage restrictions for retail clients
- Mandatory risk disclosures
- Negative balance protection requirements
- Recognition that "most retail clients lose money trading CFDs"
Other Jurisdictions
- India: CFD trading is completely prohibited due to concerns around transparency, investor protection, and enforceability
- United States: Retail CFD trading is effectively banned for US residents
- Canada: Heavy restrictions on CFD marketing and distribution
The Numbers Don't Lie
Regulatory data consistently shows that 70-90% of retail CFD traders lose money, leading to these protective measures across jurisdictions.
Why Other Countries Don't Offer Switzerland's Protection
Not all countries provide the same level of investor protection as Switzerland, leaving CFD traders particularly vulnerable:
United States
Unlike Switzerland, securities held by investors at US banks or brokerage firms are typically not segregated from the firm's balance sheet. This means in the event of insolvency, investor securities could potentially be included in the firm's assets and used to pay off creditors, rather than being returned to the investor. However, the US does have SIPC (Securities Investor Protection Corporation) coverage up to $500,000, but this is insurance-based rather than segregation-based protection.
United Kingdom
While UK regulations require client money segregation, the level of protection varies significantly between providers. CFD clients often have lower priority in insolvency proceedings compared to traditional securities holders.
Cyprus and Other EU Jurisdictions
Many CFD brokers are based in Cyprus due to favorable licensing conditions, but client protection can be limited. While MiFID II provides some harmonization, implementation and enforcement vary significantly across member states.
Emerging Markets
Many developing countries lack comprehensive asset segregation laws entirely, leaving investors completely vulnerable during broker failures. This is particularly concerning given the global nature of CFD marketing.
The Counterparty Risk Problem
CFDs carry significant counterparty risk that many investors don't fully understand:
When CFD Providers Fail
- If the CFD provider fails to meet their financial obligations, your CFD positions may become worthless regardless of underlying asset performance
- You could be right about market direction but still lose money due to your broker's financial problems
- Recovery depends on the provider's remaining assets and your position in the creditor hierarchy
Historical Failures
Cases like MF Global remind us that even supposedly secure arrangements can fail, leaving clients as unsecured creditors. More recently, several smaller CFD providers have collapsed, highlighting these risks.
The Business Model Conflict
Most CFD providers profit when clients lose money, creating an inherent conflict of interest. This "market maker" model means your losses are often their gains.
Our Commitment: Real Ownership, Real Protection
At Neobanque, we offer a fundamentally different approach:
Actual Securities Ownership
- When you buy a stock through Neobanque, you own the actual stock
- Your ownership is legally protected and segregated from our assets
- Voting rights and dividends flow directly to you
- Complete transparency in ownership structure
Transparent Pricing
- No hidden spreads or price manipulation
- Market prices reflect true supply and demand
- No conflicts of interest with our business model
- Clear, upfront fee structure
Long-term Wealth Building Focus
- Investment education and research tools
- Focus on genuine investment rather than speculation
- Sustainable investment strategies
- Building real wealth through asset ownership
Swiss-Standard Protection
Operating under Swiss regulatory standards, we ensure your investments benefit from:
- Mandatory asset segregation
- Bankruptcy-remote custody
- FINMA supervision and oversight
- CHF 100,000 deposit protection plus full securities segregation
Countries with Strong Asset Protection
Several jurisdictions follow Switzerland's model of robust asset segregation:
Leading Protection Standards
- Switzerland: Comprehensive segregation laws enhanced in 2023, with full securities segregation and accelerated bankruptcy proceedings
- Liechtenstein and Luxembourg: Similar protection frameworks with strong regulatory oversight
- Singapore: Robust legal framework with asset segregation requirements and strong rule of law
- Germany and France: Under MiFID II regulations requiring comprehensive asset segregation
Emerging Standards
Some EU countries are strengthening protections under MiFID II, but implementation varies significantly. Investors should always verify specific protections available in their jurisdiction.
However, protection levels vary significantly globally, and investors should always verify the specific protections available in their jurisdiction before investing.
The Bottom Line: Why We Choose Real Assets Over CFDs
CFDs might offer the excitement of leveraged trading, but they fundamentally fail to provide what investing should be about: building real wealth through actual ownership of productive assets.
The CFD Reality Check
Despite aggressive marketing by brokers like XTB, Pepperstone, and others, the facts remain:
- 70-90% of retail CFD traders lose money
- No real asset ownership means no genuine wealth building
- Counterparty risk puts your capital at constant risk
- Regulatory warnings exist for good reason
What Neobanque Protects You From
By avoiding CFDs entirely, we shield our clients from:
- Counterparty risk with your broker's financial stability
- Complex liquidation processes during financial crises
- False ownership without actual ownership rights
- Regulatory grey areas that often favor brokers over clients
- Conflicts of interest where broker profits come from client losses
- Market manipulation through spread widening and price skewing
Our Philosophy: Real Investment, Real Protection
We believe your financial future deserves better than speculative contracts. While some brokers like Saxo Bank and Swissquote offer both real securities and CFDs, we've made a clear choice: we offer only real investments with real ownership and real protection.
Why settle for a contract when you can own the actual asset?
Ready to invest in actual assets with full ownership protection? Explore our comprehensive directory of brokers and neo-brokers by country where you can find platforms that offer true stock ownership, not just contracts.