What is a 'Negotiable Instrument '

A negotiable instrument is a document that promises payment to a specified person or the assignee. The payee, which is the person who receives the payment, must be named or otherwise indicated on the instrument. A check is considered a negotiable instrument. This type of instrument is a transferable, signed document that promises to pay the bearer a sum of money at a future date or on demand.

BREAKING DOWN 'Negotiable Instrument '

More examples of a negotiable instrument are bills of exchange, promissory notes, drafts and certificates of deposit.

Negotiation instruments are transferable in nature, allowing the holder to take the funds as cash or use them in a nature of their choosing. The fund amount listed on the document includes notation as to the specific amount being promised, and must be rescinded in full either on demand or at the specified time. A negotiable instrument can be transferred from one person to another. Once the instrument is transferred, the holder obtains full legal title to the instrument.

These documents provide no other promise on the part of the entity issuing the negotiation instrument. Additionally, no other instructions or conditions can be set upon the bearer to receive the monetary amount listed on the negotiation instrument.

Common Negotiation Instruments

One of the more common negotiation instruments is the check. It serves as a draft, payable by the payer’s financial institution upon receipt in the exact amount specified. Similarly, a cashier’s check provides the same function, but requires the funds to be allocated, or set aside, for the payee prior to the check being issued.

Money orders are similar to checks, but may or may not be issued by the payer’s financial institution. Often, cash must be received from the payer prior to the money order being issued. Once the money order is received by the payee, it can be exchanged for cash in a manner consistent with the issuing entity's policies.

Traveler’s checks function differently, as they require two signatures to complete a transaction. At the time of issue, the payer must sign the document to provide a specimen signature. Once the payer determines to whom the payment will be issued, a countersignature must be provided as a condition of payment. This is generally used when the payer is traveling to a foreign country and is looking for a payment method that provides an additional level of security against theft or fraud while traveling.

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