Stock splits are when a company increases its shares outstanding and the share price is adjusted accordingly. For example, XYZ Corp. sets a 2-for-1 split of 100 million shares trading at $50 each. After a split, there are twice as many shares, or 200 million, trading at $25. Companies do this to lower the share price in hopes of drawing more investors into the stock.

But too many splits can have the opposite effect. Adding shares can tilt the supply-demand equation because there's a bigger supply of shares to go around. The stock price could fall. Carefully watch any stock that has split more than once in the past 12 months. Consider selling if a stock runs up 25% to 50% for one or two weeks on a stock split. However, a few hyper-growth stocks have kept climbing despite more than one split a year.

Related Resources:

Review IBD's 20 Rules For Stock Market Success.

Go to the Investor's Corner Archives to read IBD's "editor picks" of classic Investor's Corner columns.

Search our archive of Ask Bill O'Neil Q & A's organized by topic.