Understanding Negotiable Instruments: Your Guide to Liquid Assets and Modifiable Contracts

Learn about the dual nature of 'negotiable' in business, from pricing flexibility to transferable financial instruments.

What Does ‘Negotiable’ Mean?

The term ’negotiable’ has two main interpretations in business contexts:

  • Flexible Pricing: A negotiable price indicates that the asking price is open for discussion between a buyer and a seller, and may be revised if both parties reach an agreement.
  • Transferable Assets: A negotiable instrument is an asset with a guaranteed cash value that the owner can swap for goods, deposit, or sell. These are also known as marketable, transferable, or unregistered assets.

Key Takeaways

  • The word ’negotiable’ often implies that the price of a product for sale is not fixed.
  • A negotiable instrument is a document with face value that can be traded for cash or goods, like a dollar bill or a certificate of deposit.
  • These instruments are liquid assets, easily transferred to a new owner.
  • Non-negotiable instruments lack this ease of transfer; for example, a check made out to a specific individual must be endorsed by the original payee before it has value to another person.

Dive Deeper Into Negotiability

Many securities, such as stock shares, are termed negotiable instruments because their ownership can be easily transferred. However, their market value is subject to fluctuations.

Other negotiable instruments, such as cash, maintain a fixed value. For instance, a $10 bill retains its value even though its purchasing power can vary due to inflation or deflation. It remains a negotiable instrument because legal ownership of the $10 can be effortlessly transferred from one party to another.

A legal document or instrument is considered ’negotiable’ if it can be used as a cash substitute, representing a promise of payment at a future date. The term implies trust and reliability equivalent to cash.

Characteristics of a Negotiable Instrument

Negotiable instruments contain an unconditional promise to pay a certain amount of money. Their agreements typically include instructions on when payment is due, which can be on-demand or set for a future date. Some negotiable instruments must be specified to a particular person or entity.

To be perceived as usable as cash or under the law, a negotiable instrument must be a signed written document detailing an unconditional promise or order to pay an exact amount.

Types of Negotiable Instruments


A check is a dated draft instructing a bank to make a specific amount payable on-demand. Individuals or companies write checks for the payee’s benefit, with the money withdrawn from the payor’s bank account upon cashing or deposit.

Certificate of Deposit

A Certificate of Deposit (CD) is a negotiable instrument provided by banks whereby customers deposit money for a fixed term, earning interest. Although the principal amount can often be withdrawn upon demand, this usually means forfeiting interest and potentially incurring penalties.

Promissory Note

A promissory note is a written promise in which one party commits to paying a specific amount to another party at a future date. This document details the amount owed, issuance date, interest rate, and the payer’s signature.

Bill of Exchange and Drafts

A bill of exchange is much like a post-dated check, committing a party to pay another party a set amount on-demand or by a future date. Widely used in international trade, it consolidates buyer-seller financial obligations.

A time draft demands payment on a future date, while a sight draft demands immediate payment upon delivery.

Negotiable vs. Non-Negotiable Instruments


In lease agreements, the fixed monthly rent or lease payment is generally non-negotiable. Mixed contracts, such as employment agreements, might separate negotiable aspects (like salary) from non-negotiable terms (like conduct policies).


Certain securities, like U.S. government savings bonds, are non-negotiable since they can only be cashed by the bond owner. Conversely, coins and paper money are negotiable.


Negotiable securities are liquid and easily transferrable or sold in the market, while non-negotiable instruments are illiquid with limited marketability. Familiarize yourself with negotiable and non-negotiable terms before entering any contract.

What Is a Negotiable Instrument?

A negotiable instrument guarantees payment of a specified amount and can be exchanged and transferred between parties, making it a readily liquid asset. Cash is a classic example of a negotiable instrument.

What Are Non-Negotiable Documents?

Non-negotiable documents are assigned to a single owner and are not easily transferrable. U.S. government savings bonds exemplify such documents, cashable only by their original owners.

What Is a Non-Negotiable Check?

A non-negotiable check holds no monetary value and serves as a receipt or record of payment, typically handed to employees whose pay is directly deposited.

The Bottom Line

Negotiable instruments are legally binding documents ensuring a specified monetary value when transferred. Whether exchanged for goods, cash, or deposit, these instruments tie into the broader concept of negotiable offers and terms seen in many business contracts.

Related Terms: Securities, Checks, Certificates of Deposit, Promissory Notes, Bill of Exchange, Time Drafts, Sight Drafts, Non-negotiable instruments.


Get ready to put your knowledge to the test with this intriguing quiz!

--- primaryColor: 'rgb(121, 82, 179)' secondaryColor: '#DDDDDD' textColor: black shuffle_questions: true --- ## What does the term "negotiable" mean in a financial context? - [ ] Non-transferable - [ ] Restricted to a single owner - [x] Transferable and can be traded - [ ] Required to pay dividends ## Which of the following is an example of a negotiable instrument? - [x] A check - [ ] A home mortgage - [ ] An employment contract - [ ] An insurance policy ## What key feature of negotiable instruments makes them useful in commerce? - [ ] Long-term holding - [x] Ease of transferability - [ ] Fixed interest rate - [ ] Unalterable terms ## How does a negotiable instrument differ from a non-negotiable instrument? - [ ] A negotiable instrument is a legal document, while a non-negotiable instrument is not - [ ] A negotiable instrument cannot be traded - [x] The holder of a negotiable instrument can transfer the instrument to another party - [ ] The value of a non-negotiable instrument fluctuates ## Which of the following terms is synonymous with “negotiable”? - [x] Transferable - [ ] Non-liquid - [ ] Indivisible - [ ] Unmodifiable ## What is a common setting where negotiation of financial instruments occurs? - [ ] Marriage counseling - [x] Financial markets - [ ] Classroom - [ ] Health care ## Which party primarily benefits from a negotiable instrument? - [ ] The issuer only - [ ] The secondary market - [x] Both the holder and the transferee - [ ] Regulatory bodies ## In the context of securities, what makes an instrument negotiable? - [ ] The need for physical presence to trade it - [x] Its ability to easily be transferred from one party to another - [ ] Its fixed interest rates - [ ] Restricted ownership clauses ## What is the legal implication of a financial instrument being negotiable? - [ ] It can only be issued by banking institutions - [ ] It remains in the possession of the issuer until maturity - [x] It grants the holder the right to transfer it to another party - [ ] It must pay dividends regularly ## Which financial document could be classified as non-negotiable? - [ ] A certificate of deposit (CD) - [x] An IOU between friends - [ ] A treasury bill - [ ] A bond