What Is a “Negotiable Instrument”? Your Ultimate Guide

What is a negotiable instrument? It’s a transferable financial obligation that legally entitles the holder to an underlying value. Negotiable instruments range from basic checks to certificated ownership documents like immobilized bearer shares.

In this article, we’re going to share everything you need to know about negotiable instruments and answer several common questions we receive as well.

Feel free to use the table of contents to jump ahead to the sections most relevant to you.

Table of Contents

  1. What Is a Negotiable Instrument?
  2. What Are the Four Types of Negotiable Instruments?
  3. Frequently Asked Questions
  4. Do You Want Help Opening Bank Accounts?

What Is a Negotiable Instrument?

A negotiable instrument is a document with an underlying value that can be transferred from one party to another and exchanged for currency. Negotiable instruments are legally enforceable payment instruments that transfer financial obligations and can settle commercial transactions. 

Examples of negotiable instruments range from a promissory note, bill of exchange, cheque, certificates of deposit, and bearer shares. For your reference, the term commercial paper may also be used to describe certain negotiable instruments.

While there are differences between each of these negotiable instruments, they share underlying characteristics of transferability and underlying value.

That said, the jurisdiction where the negotiable instrument is issued can also impact its form and function. For example, many jurisdictions require negotiable instruments to be officially recorded and verified by a Notary public.

The role of negotiable instruments in commerce cannot be understated, including the important part they play in facilitating international trade through major commercial banks. The legal rights of negotiable instrument holders are what allow different parties in cross-border transactions to have confidence.

Not surprisingly, commercial and international banks play a crucial role in the issuance, distribution, and settlement of negotiable instruments. However, not all instruments are settled by financial institutions, such as bearer shares.

What Are the Four Types of Negotiable Instruments?

Four types of negotiable instruments include bank cheques, promissory notes, bills of exchange, and certificates of deposits. As a bonus, bearer shares are also considered negotiable. We’ll explore each of these types of instruments in greater detail below.

Bank Cheque

A bank cheque is a negotiable instrument because it is a transferable instrument with a specific underlying value that can be exchanged for payment by the holder.

Promissory Notes

Promissory notes, like cheques, entitle the holder of the note to receive a specified amount of money in exchange for the note. However, unlike cheques, certain promissory notes have specific terms surrounding their exchange. For example, certain notes may only be eligible for exchange at a point in the future while others may be eligible for exchange on demand by the holder. Notes payable is another name for a promissory note.

Bill of Exchange

A bill of exchange is a binding agreement that ensures payment from one party to another. Bills of exchange are common in short-term payment in international trade.

Certificates of Deposit

Certificates of deposit are also negotiable instruments because they are marketable instruments that can pass to different parties. For this reason, they are transferable and therefore considered a negotiable instrument.

Bearer Shares

Bearer shares are the final example of negotiable instruments that we will consider. They are not in use in most countries today. But they were once popular. The reason that they are negotiable is that they can pass from person to person and the individual with possession is the owner. Additionally, they represent an underlying asset, which is the shares in an entity.

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Frequently Asked Questions

Below are a few of the most common questions we receive from people looking into this topic. If you have further questions you would like to ask our team, don’t hesitate to get in touch.

What Are Negotiable Instruments Used For?

Negotiable instruments may be used for a wide range of transactions and purposes, including payment when settling a transaction, transferring financial obligations, transferring ownership of an entity or asset, and facilitating trade.

What Are the Two Kinds of Negotiable Instruments?

There are more than two kinds of negotiable instruments. But, two of the most common types of these instruments include cheques and promissory notes. A bank cheque is a financial instrument because it entitles the holder to receive a specified amount for the document. A promissory note is a financial instrument because, like a cheque, they deliver to the recipient a specific amount of value when they exchange it for payment.

What Is a “Negotiable Instrument” in Banking?

In the world of banking, a “negotiable instrument” is a financial document that has an underlying value and is transferable. In many instances, these instruments are used as a form of payment. Not surprisingly, banks and other financial institutions play a significant role in the issuance, distribution, and settlement of many different types of financial instruments.

What Is Meant By “Negotiable Instrument”?

“Negotiable Instrument” means a transferable and enforceable financial obligation. There are many different examples of these instruments, but they all share the same underlying characteristics. These characteristics include that ownership can pass to another person and they are exchangeable for currency. Additionally, depending on the specific instrument in question, the individual holding the instrument has certain rights.

What Is the “Negotiable Instrument Act”?

The “Negotiable Instrument Act” is legislation in India originating in 1881 during the British Raj. It offers a framework for the use of financial instruments in India and other jurisdictions. The most recent amendment to the Act was in 1988, which attempted to reduce widespread default on cheques by making it a criminal offense.

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GlobalBanks Team
GlobalBanks Team

The GlobalBanks editorial team comprises a group of subject-matter experts from across the banking world, including former bankers, analysts, investors, and entrepreneurs. All have in-depth knowledge and experience in various aspects of international banking. In particular, they have expertise in banking for foreigners, non-residents, and both foreign and offshore companies.

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