Final answer:
The par value of common stock is the legal capital per share assigned during a corporation's establishment, which is different from both market value and liquidation value. It is used for legal and accounting purposes and does not reflect current stock market fluctuations or expected returns.
Step-by-step explanation:
The par value of common stock represents the legal capital per share of stock assigned when the corporation was first established. This value is designated in the corporate charter and is typically set at a minimal amount. It has little connection to the market value, which fluctuates based on investor demand, or to the liquidation value, which is the amount that would be paid out if the corporation were dissolved. The par value is primarily an accounting figure used for legal purposes, and it often represents the minimum amount the shares can be sold for during the initial offering.
When a company issues stock, it does so to raise financial capital. The first sale of stock to the public is known as the Initial Public Offering (IPO). Following the IPO, the company does not receive further funds from subsequent sales between investors. Investors seek a rate of return, which can be through receiving dividends or realizing capital gains when selling the stock at a higher price than the purchase price.