(MONEY Magazine) – Say you run Microsoft. Your stock is no slouch (you know because it's made you the world's richest guy). Your core software operation reaps hefty profits. As for the Internet, well, your Web business runs circles around all those dotcoms coming to market of late. But their stocks trade at 50 times annual sales to your 22. What's a CEO to do?

You could create a tracking stock for the Web business--which, according to Wall Street speculation, Microsoft is considering. A tracking stock lets a company segregate its businesses so separate stocks can track their performance. The hope is that the stock representing the fast-growing business rates a high enough multiple to raise the market capitalization of the company as a whole (see the table above). Tracking stocks predate Internet fever, but the lure of stratospheric Web valuations will make them more common. Disney recently announced that it will create a tracking stock for Go.com, its online content provider. Publisher Ziff-Davis created one in March for its Web information provider ZDNet, and brokerage firm Donaldson Lufkin & Jenrette did so in May with online broker DLJdirect.

As of late August, there were 36 such stocks (including the original issues, which technically become tracking stocks too). But Lehman Bros. investment banker Barbara Byrne says, "I've had more inquiries in the last six months than in the last six years."

Tracking stocks certainly hold powerful attractions for the corporations that issue them. Unlike with a spin-off, the parent retains control. The tracked businesses hold on to the parent company's credit rating, thus saving on borrowing costs. The newly issued stock may even attract another set of analysts, broadening the firm's exposure to investors. With little pain, and with no change in its operations, the company can gain a richly priced stock that serves as a powerful acquisition currency and a tool to retain or recruit employees.

But are tracking stocks a good idea for investors? Their record isn't long enough to say for sure, but it is clear that they are no magic bullet. Shareholders in a parent company's stock don't always get cut in on the action, and investors who buy the new stock must wrestle with more complications than they would with common stock. Moreover, while tracking stocks tend to rise at first because they're in hot sectors, high-multiple areas of the market can crash hard and fast. Investors embraced CarMax in 1996, for example, but the stock collapsed once it was clear that used-car superstores were going to have trouble generating profits; parent Circuit City's stock, meanwhile, has soared. More recently, both DLJdirect and ZDNet nosedived along with other Web stocks over the summer.

On the other hand, there are success stories. Take high-tech manufacturer Quantum Corp. Investors were focusing on its struggling hard-disk-drive business, even though Quantum's tape-drive-storage systems boasted 89% market share and 30% earnings growth--and generated all the company's profits. Since Quantum created stocks to track the separate businesses, "our market cap's gone up 60%," says CFO Richard Clemmer. Investors got a nice boost too. Quantum traded for $17 before it was split up. The tape-storage stock now trades for $21, the hard-drive stock for $8. Quantum shareholders received one share of the former and half a share of the latter, so they now hold stock worth $25, a gain of 47%.

What's the downside? Increasingly, however, companies are choosing to sell the new stock in a public offering. Existing shareholders don't get any unless they buy into the IPO. And there are the added complications of tracking stock ownership to consider. An investor buying a typical stock can expect that the board of directors will act in shareholders' interests--at least that's the law. But with tracking stocks, a single board governs parents and offspring. "That's sure to bring up all sorts of conflicts of interest," contends Jeffrey Haas, a professor at New York Law School.

Those conflicts are readily apparent when it comes to Web businesses that compete for the same customers as their parents. Will DLJdirect, for example, ever be as aggressive in its marketing as E*Trade, which doesn't have to worry about taking customers from its parent or hurting that parent's image with an obnoxious ad? DLJdirect's prospectus, in fact, warns that such conflicts exist. The company notes that there can be no assurance "that either entity will not expand its operations to compete with the other."

And should a parent decide that a tracking stock no longer serves its interests, shareholders have no say in how their investment is unwound. The board could decide to absorb one stock into the other, meaning you end up with a stake in a business you may not have wanted. Or the board might opt to sell off the business' assets, forcing you to cash out and pay taxes on any gains.

The bottom line: Tracking stocks are a lot like the kids of celebrities. At first, their famous lineage gives them a leg up. But soon enough they are judged on what they accomplish.

--LISA REILLY CULLEN