CFD trading in Canada: complete guide

A contract for difference (CFD) is a derivative that lets you speculate on changes in the price of an underlying asset without owning the asset itself. In Canada, CFDs are overseen by CIRO and offered by several brokers that are members of the CIPF. They let you take a long (buy) or short (sell) position on stock indices (S&P 500, S&P/TSX 60, Dow Jones), stocks, commodities (gold, oil) and currency pairs.

CFDs are leveraged products: an initial outlay, the margin, gives you exposure to a larger amount. This feature amplifies potential gains but also losses, which can exceed the initial deposit. In Canada, leverage is governed by CIRO margin requirements, which vary by type of instrument.

A CFD tracks the price of an asset without you owning it. You choose a direction (buy if you expect a rise, sell if you expect a fall) and a position size, then close the position whenever you want. Your gain or loss is the price difference multiplied by the position size, minus fees.

Example: you buy 10 CFDs on a stock priced at $100, for an exposure of $1,000. With a 20% margin, you tie up $200. If the stock rises to $110, your gross gain is $100, or 50% of the margin committed. If it falls to $90, you lose $100, half of your margin, plus the spread and any financing fees.

Buying a stock makes you a part-owner of the company: you receive dividends, you can vote at meetings and you can hold the shares for as long as you like with no holding costs. With a CFD, you own nothing: the broker pays or charges you an adjustment equivalent to the dividend, and you have no voting rights.

On the other hand, a CFD makes short selling simple and lets you use leverage, which a regular stock account does not, or only under conditions. CFD positions carry daily financing fees, which makes them better suited to short horizons than to a multi-year investment. Finally, CFDs are not eligible for registered accounts such as an RRSP or a TFSA.

In Canada, CFDs are over-the-counter derivatives overseen by the provincial and territorial securities regulators, including the Autorité des marchés financiers in Quebec. Dealers that offer them to retail clients must be members of CIRO, which sets the requirements for capital, segregation of funds and margin. These margins determine the maximum leverage. The maximum leverage allowed in Canada by CIRO can reach 50:1 on the main currency pairs. Minor pairs, exotic pairs and stock CFDs are subject to stricter limits. The exact margin rules vary by instrument, and each broker can apply internal caps that are more conservative than the CIRO limit.

The instruments offered vary by broker: currency pairs, indices, stocks, commodities, bonds and ETFs. Cryptocurrencies are generally not offered as CFDs by the brokers in our ranking. CIPF protection, up to $1 million per account category, covers the dealer's insolvency, but not trading losses.

Five criteria help you compare the CFD brokers available to Canadian residents.

1. CIRO regulation and CIPF membership. Check the dealer's registration on ciro.ca before making any deposit: the contract is entered into with the broker, not on an exchange.
2. Instruments offered. The number of indices, stocks and commodities varies widely from one broker to another: from a few hundred to more than 2,500 instruments.
3. Spreads and financing fees. Compare the spread on the instruments you are targeting and the overnight financing fees, which weigh on positions held for several days.
4. Negative balance protection. It is not mandatory in Canada. A broker that offers it, such as Plus500, prevents losses from exceeding the capital deposited.
5. Platforms and customer support. Proprietary platform, MetaTrader or TradingView depending on the broker; the 6 brokers in our ranking offer customer service in English and French.

Trading CFDs involves a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. A modest change in the price of the asset can wipe out all the margin on a position. When the available margin becomes insufficient, the broker can automatically close your positions, often at the worst possible time.

Unlike the European Union, Canada does not require brokers to provide negative balance protection. During a sharp market move, the loss can therefore exceed the capital deposited and leave a balance to repay, unless the broker offers this protection, as Plus500 does. CFDs also carry counterparty risk: your contract is entered into with the broker, not on an exchange.

CFDs are not suitable for all investors. Before opening an account, read the risk disclosure statement provided by the dealer and the investor resources published by CIRO on ciro.ca.