One of the greatest concerns for all people who invest into equities is the possibility that they could be misled by ... manipulative accounting practices.

Enron made this type of activity famous with some rather clever accounting tricks using financial derivatives. Other financial derivatives crises include the Long-Term Capital Management hedge fund in 1998 and the more recent case involving the bankruptcy of Italian foods giant Parmalat.

The possibility of the company that you are invested in is going bankrupt because of the collapse of fraudulent financial dealings is just a small part of what is potentially a much greater problem involving financial derivatives.

Ten years ago, most people did not even know what financial derivatives were.

Recently, however, the use of derivatives has become much more prevalent, and the pace with which new varieties of derivatives instruments are being created is astounding.

Derivative instruments can be very effective hedging tools when used properly to transfer risk from one party to another who is more equipped to bear that risk.

Derivatives can also be used for high-risk speculation, and have been involved in complex schemes used by companies to create fictitious assets and report fake earnings.

Many people now believe that a massive financial bubble is being created through the use of financial derivatives that puts the entire global monetary structure at risk.

The greatest danger with derivatives is that they are still not very well understood by most people. In fact, there are probably many executives of major corporations who do not fully understand some of the derivatives that they are using!

So far, the negative effects of financial derivatives have been relatively well-contained to a few cases involving fraudulent activity.

Nevertheless, it seems that the potential danger of a financial collapse involving these instruments will be quite real.