One market - Two contrasting scenarios

Over the last few months, the stock market has seen its wild share of ups and downs. We have witnessed the impact of the budget, US-Iran issue, US-China issues and finally, the biggest one of this year, the 'COVID-19 pandemic'. The markets have borne the impact all these situations. 

However, it must be noted that the use of the word 'market' actually refers to the indices that are a complex composite of a few representative stocks. These indices give us a general trend in the stock universe. Although the market risk could be assumed to be the same for all the stocks, the stocks themselves exhibit varying idiosyncratic risk. This results in deviations in the stock price behaviour from the majority stocks universe. 

Presently in the market, two such contrasting stocks are Reliance Industries and Vedanta Limited which help to exhibit this phenomenon. While Reliance, on the one hand, issued rights shares at a discount to market price, Vedanta is in the process of delisting its stocks from the Indian bourses, which is mostly done at a premium to market price. 

Commonly, a company goes for a rights issue, often at a discount, when it perceives the stock to be correctly priced or overpriced. Additionally, delisting is done because the management might believe the current market prices are at a significant discount.

Ironically, both Reliance and Vedanta are behaving in a way suitable to them, yet their behaviours have such stark differences. Thus, irrespective of what we perceive of 'the market', these two stocks are showing two contrasting valuation scenarios at the same juncture.

While Vedanta is trading at a lower level compared to its 52-week high, Reliance is trading at its 52-week high level and continues to attain newer highs. Therefore, it is seen that the same market environment might still result in varying stock performances and one must not trade or invest by merely following the indices and making decisions just on the trend the indices are showing. The stocks individually might exhibit far different results, as can be seen from the above example.