Negotiable Instruments

What are Negotiable Instruments?

Negotiable instruments are a type of document that guarantees the payment of a particular amount of money at a set time or on-demand and the payer’s name is generally mentioned on the document and its most common types are checks, promissory notes, bills of exchange, customer receipts, delivery orders, etc.

Brief Explanation

A Negotiable Instrument is generally a signed document that is freely transferable in nature, and once it is transferred, a transferee or the holder of an instrument will get legal right to use it in whatsoever manner as he deems appropriate.

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Types of Negotiable Instruments

There are various types of Negotiable Instruments that we use in our daily life, and few of them are listed below;

We will discuss the above main types of Negotiable Instruments in detail.

#1 – Currencies

Currencies, i.e., Bank Notes and Coins, are a very common type of Negotiable Instruments which we all use in our daily life as a medium of exchange to settle our trades. The government guarantees and promises to pay a sum of rupees mentioned on the currency note to the bearer thereof. This is a safe medium of exchange against the value of something. We can freely transfer the currencies from one person to another in consideration of something. The bearer of the banknote is a legal owner of the amount mentioned on it, and he obtains a promise to receive goods, services, or any other things in consideration of the amount of note he possessed. This is a very safe and most liquid type of asset or property and generally has no expiry date, hence stored for the emergency. However, the currencies have the greatest risk of stolen by the thefts or damage in use, so these have to be handled with proper care.

#2 – Cheques

The Cheques are the substitute of the currencies and a very safe mode of transfer of payments among the merchants. It can either be a bearer cheque and one who possesses that will get the amount mentioned on it or an account payee cheque endorsed in the name of the particular entity. Unlike currencies, it generally has a specific expiry date and hence can’t be stored for a longer time period. It has no risk of stolen unless it is a bearer cheque. A Cheque generally takes time to transfer funds in the accounts of the beneficiary, and hence it is considered as the less liquid form of transfer.

#3 – Promissory Notes

A Promissory Note means one party (the maker) promises to pay a sum of rupees to a person whose name is mentioned on the note on a fixed future date. Generally, it is used as short-term trade credit, and the maker will pay the due amount on or before the expiry of the note. It is also a very safe mode of transferring money, and business people frequently use it to have smooth business transactions. One can claim his fund in the court of law on mere non-delivery of promised money to him after the expiry of the term. It is also considered and used as a debt instrumentDebt InstrumentDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term more, and corporations who need to finance their short-term projects will issue the promissory notes.

#4 – Bills of Exchanges

Bills of Exchanges are similar to promissory notes where one party promises to pay the sum of money to another party or to any other person in his order on a fixed future date. Just like a promissory note, business people use it to provide short-term trade creditsTrade CreditsThe term "trade credit" refers to credit provided by a supplier to a buyer of goods or services. This makes it is possible to buy goods or services from a supplier on credit rather than paying cash up more to their business partners. The person on whose name it is endorsed (the Drawee) will have a valid claim on the bill writer (the Drawer) for the amount mentioned on the bill. In case of the urgency of a fund, the Drawee can discount his bill before the due date from any bank and get the bill amount from the bank after deducting some discount on it, and thereafter bank will collect the full billing amount from the Drawer on the due date, and this entire transaction is called as Bill Discounting.

#5 – Bearer Bonds

These are the unregistered bonds issuedBonds IssuedA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed more by the Government or Corporate, and as the name suggests, the holder of the bond is entitled to get a coupon and principal payment thereon. The issuer doesn’t keep the record of the original owner of the bond. Whoever has the physical possession of the bond will be treated as the legal owner of it. Therefore, there is a huge risk of loss, theft, or otherwise, the destruction of these bonds.


The Negotiable Instruments are very effective business channels in the financial marketFinancial MarketThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market more of any country. Negotiable Instruments helps in smoothing secured commercial and other transactions for money or monies worth. The unique features like transferability, the legality of documents, safety, liquidity, etc., make them more popular in having businesses domestically and globally as well.

However, in today’s modern world, technology brings businesses to a very high level, and the use of the above Negotiable Instruments is reducing day-by-day. There are so many effective banking channels are established now that will reduce the time and cost of execution of commercial transactions worldwide. Now a day people are more comfortable doing transactions through Internet Banking, NEFT, RTGS, Debit & Credit Cards, Virtual Cards, and the availability of so many modern instruments that may cause the end of traditional Negotiable Instruments.

This has been a guide to what are Negotiable Instruments?. Here we discuss the meaning of negotiable instruments, the top 5 types of Negotiable Instruments, including promissory notes, currencies, bearable bonds, bills of exchange, and cheques. You may also take a look at the following articles to learn more –

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