Definition: Negotiable instruments are written orders to pay or documents that guarantee the payee a specific payment on a stated date or demand and can be freely traded as a currency substitute.
What Does Negotiable Instruments Mean?
What is the definition of negotiable instruments? They are documents used to execute a contract for which the payment must be made afterwards on demand or on a set date without condition and hesitation. Not all of these instruments are legal tenders, but all are binding.
These instruments are freely transferrable, only if the name of the payee is not stated on the document. In other words, if no name is stated, the payee is simply the owner of the instrument. Thus, as possession changes, so does the payee. If the name of the beneficiary or payee is stated on the instrument, only the payee can demand payment unless it is signed over to another person or simply endorsed. For example, a check written out to Joe can only be cashed by Joe unless he signs it over to someone else or simply endorses it. Once the check is endorsed, it is as good as currency and anyone can cash it.
These instruments are used in business to allow the payment of a certain amount at a later date. It is also used in place of physical currency when the amount of currency being used is impractical or unsafe to transport.
Let’s look at an example.
Example
Examples of negotiable instruments include banknotes, checks, promissory notes and bill of exchange.
Checks are the most common promissory notes used by the general public to transact business or make payments. A check requires a payee, date, authorization, and an amount in both words and figures to be valid.
A check can be cashed or deposited into another account on or after the date written on its face. It cannot be executed before that date. Checks can also be negotiated to third parties. For example, Tim writes Steve a check for $300 for doing odd jobs around his house. After Steve gets paid from Tim, he purchases a piece of equipment from Bill for $300. Steve can simply endorse the check he received from Tim over to Bill as payment for the equipment. Bill can then cash or deposit that check in his bank account.
Summary Definition
Define Negotiable Instruments: Negotiable instrument means a debt security that pays an assignee a specific dollar amount and can be transferred to another party.
