American domestic guru and TV tycoon Martha Stewart went to jail for five months. When she was allowed out on probation, she wore an electronic ankle bracelet so that the police would know if she has stepped out of her house.

Her crime?:

She was told by her friend, Sam Waksal, that his company Imclone‘s cancer drug has been rejected by the food and drug administration. Before this information was made public, Stewart told her broker to sell her 4,000 shares in the company and escaped unhurt when the stock got hammered. The day after she sold the stock, it dropped 16 per cent to $46 and Stewart saved $45,673.

From the above example, it is evident that those trading on the basis of insider information have an opportunity to enter and exit at the correct time.

Finally, when the news goes public, the stock goes back to its realistic price level.

Result: an ordinary investor, with little information, is stuck with the stock at a price, which could be too high or too low, while those who have inside knowledge manage to make a packet and a safe exit.

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