Types of negotiable instruments include simple bank cheques, complex financial instruments, and even corporate stock certificates like bearer shares.
In this article, we’re going to share some of the most common negotiable instruments along with a few others you haven’t heard of. Plus, we will also answer some of the most common questions we receive about negotiable instruments.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Types of Negotiable Instruments
- Examples of Negotiable Instruments
- Negotiable Instrument vs Non-Negotiable Instrument
- Frequently Asked Questions
- Do You Want Help Opening Bank Accounts?
Types of Negotiable Instruments
Types of negotiable instruments include promissory notes, bills of exchange, cheques, certificates of deposit, bearer shares, bank drafts, traveler’s checks, money orders, and certain debt instruments like Treasury Bills.
That said, certain legislation, like the banking law in India specifies only a few types of negotiable instruments. In this case, they identify only promissory notes, bills of exchange, and cheques.
That said, all types of negotiable instruments are a medium of exchange and have the same underlying characteristics of transferability, negotiability, and banker’s acceptance in exchange for currency that is legally enforceable.
In the next section, we will take a closer look at specific types of negotiable instruments.
Examples of Negotiable Instruments
Promissory Notes
Promissory notes are essentially a promise to pay and they are freely transferable to other parties outside of the original agreement, which makes them a negotiable instrument.
Personal Traveler’s Checks
Personal traveler’s checks are prepaid instruments that have an underlying cash value and are easily transferred. These characteristics make them an obvious example of negotiable instruments.
Money Orders
Money orders are similar to personal traveler’s checks as they are a prepaid form of payment, which is transferable to the party receiving or holding the money order.
Bills of Exchange
Bills of exchange, like the other examples, are exchanged for currency by the holder. These are transferable but typically involve specific parties in a specific transaction.
Bank Cheques
Bank cheques are also considered a negotiable instrument because they are payment orders issued that can be endorsed and transferred to another individual before being exchanged for currency.
Certificates of Deposit (CDs)
Certificates of deposit are another negotiable instrument because they can be bought, sold, and traded prior to their maturity date. At maturity, CDs are then exchanged for currency by the individual holding them at the time.
Bearer Shares
Bearer shares are also considered a negotiable instrument because they represent ownership in an underlying asset or entity, which can be exchanged. Additionally, bearer shares are extremely transferable, passing ownership to whoever holds them.
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Negotiable Instrument vs Non-Negotiable Instrument
The main difference between a negotiable instrument and a non-negotiable instrument is that a negotiable instrument is transferable, negotiable, has an underlying value, and its exchange is legally enforceable while a non-negotiable instrument lacks negotiability and can rarely be transferred.
Additionally, while the exchange of a negotiable instrument for currency by the current holder is legally enforceable, a non-negotiable instrument is only between the original parties.
Frequently Asked Questions
Below are a few of the most common questions we receive from people looking into the types of negotiable instruments. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
What Are the Four Specific Types of Negotiable Instruments?
There are more than four specific types of negotiable instruments. However, four examples of negotiable instruments include promissory notes, bank cheques, bills of exchange, and certificates of deposit.
Is Cash a Negotiable Instrument?
No, cash is not a negotiable instrument. Instead, cash refers to physical currency and a medium of exchange. On the other hand, one of the underlying characteristics of a negotiable instrument is that it can be exchanged for currency. Additionally, negotiable instruments are also negotiable, while cash is not.
What Are the Types of Negotiable Instruments In Banking Law in India?
India sets out three specific types of negotiable instruments in the Negotiable Instruments Act, which is a piece of banking legislation that was first introduced in 1881 by the British. Recently amended in 1988, the law states that a promissory note, bill of exchange, and a cheque are all considered negotiable instruments. This is in Section 13 (a) of the Negotiable Instruments Act.
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