Murder Holes: 5 Products That Will Kill Your Net Worth

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Thanks to Hollywood, most Americans imagine that the castles and keeps of medieval Europe were romantic places where princesses found their true loves and benevolent kings hosted sumptuous banquets for their subjects. The reality is that they were fortified strongholds, designed to defend against foreign marauders and hostile clans.

One of the most ominous features of these structures was an opening in the ceiling through which rocks, hot sand or boiling oil could be rained down upon attackers. The concept behind the murder hole was that once your were caught in it, you were doomed.

In 2012, Josh Brown, aka The Reformed Broker, appropriated this term in his book "Backstage Wall Street" and applied it to a number of financial products sold by aggressive salespeople chasing fat commissions. Like the murder holes of old, if you find yourself in one of these products, you stand very little chance of escaping unscathed.

1. Structured Notes with Principal Protection

Often billed with reassuring names like "capital guarantee," "absolute return" or "minimum return," these products claim to protect your principal investment and give you a guaranteed (but fixed) return, even if the market goes down. In essence, they promise you a no-lose situation.

The problem is that most of these products are derivatives -- backed by no underlying assent -– and thus are only as good as the company behind it. If the company goes out of business or bankrupt, your entire investment is gone.

The other downside is that these type of notes are generally offered after the market has experienced a large decline. Investors who see them as safe will pile in, but when the market eventually recovers, these investments will underperform because their maximum return is capped.

2. Private Placements

A private placement is a stock offering by a company that is not registered with the Securities and Exchange Commission and is not offered to the general public. The exclusivity associated with such an offering and the ability to get in on the ground floor make for a good sales pitch by less than scrupulous salespeople.

But with an unregulated entity, you will generally get limited information about the management team and little or no financial reporting. Many companies that offer private placements are not required to file financial reports, so you may also have a hard time finding out how the company -- and your investment -- is performing.

And worst of all, private placement shares are not actively traded on an exchange or in the open market, so they are virtually impossible to sell if needed. Your investment for all intents and purposes becomes worthless unless the company issuing the shares is bought or goes public -- two things that may never happen.

3. Currency and Forex Trading

Investors who trade in stocks and options can be rest assure that there is a highly level of transparency and regulation in the industry. The SEC, the Financial Industry Regulatory Authority and other agencies are tasked to see that brokers follow the letter of the law and that programs like Securities Investor Protection Corp. insurance safeguard client funds in case of financial malfeasance.

The currency market however is largely unregulated, with the Commodities Futures Trading Commission having nominal oversight in the U.S. But currency trading is an international game and many of the brokerages are based in offshore safe havens like Cyprus and the Maldives –- far beyond the reach of the CFTC.

Forex trading also allows for extremely high levels of leverage –- in some cases as high as 100 to 1 -– which increases the risk that a sudden more in the price of a currency can wipe out your account or the brokerage where your account is held.

4. Any Type of Financial 'System'

Charles Ponzi is merely one of the most notorious of the never-ending stream of scam artists claiming to have a surefire way to make money in the markets. But usually the only person who makes money is the fraudster themselves.

Common sense says that if somebody truly had such a system, they would hole up in a room and spend all their free time using that system to coin money. Why would then need to sell it to anybody? Why would they want to sell it to anybody?

Most systems, like the A/B scam, for example, will initially show a return, making them seem legitimate. Unfortunately this is just a ruse to get investors' confidence up, encouraging them to make a large investment. When they do, the system invariably fails, and the perpetrator disappears.

5. One-Drug Biotech Companies

Nothing can shoot a stock up faster than getting approval from the Federal Drug Administration on a breakthrough drug. Many of the current giants in the biotech field started out just that way, but many more companies went bust when their only viable product was rejected.

When you are investing in a one-drug company, not only are pinning your hopes on a single product, but a product will be judged to be either a complete failure or a complete success by a government entity. And the chance, historically, is small: a low as 10 percent, one study found.

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