What Does Negotiable Mean?
The term “negotiable” is commonly referred to as the price of a good or security, or any other term or provision in a contract or an agreement, that is not firmly settled between the parties and can be adjusted. The negotiable price of a good or the negotiable term of an agreement can be modified depending on the prevailing circumstances.
For example, if a seller of a good states that the sale price is negotiable, he or she implies that in some circumstances, the final sale price can be changed from the price initially stated.
Applications in Finance
In finance, the term negotiable comes with a specific connotation. It is usually referred to as a legal document or a financial instrument that can be used as a replacement for cash. Essentially, a negotiable instrument guarantees the payment of a specific amount of money to the payer recognized on the paper.
The payment must be remitted either on demand or at a predetermined future date. The date is not a necessary feature for an instrument as the absence of date cannot influence its negotiability.
Negotiable instruments are transferable by the endorsement (i.e., signed by the payer) and delivery of the document. Once a negotiable instrument is transferred from the holder to the payer, the holder obtains full and unconditional legal right to receive the amount of money specified in the document. The exact definition of a negotiable instrument is generally determined by the law, and the definition may vary from country to country.
Note that such instruments do not bear any other promises except the promise of unconditional remittance of the payment. At the same time, they cannot apply any other conditions upon the bearer to obtain the funds stated in the instrument.
Examples of negotiable instruments include cheques, money orders, promissory notes, drafts, and certificates of deposit (CDs). Among all the examples mentioned above, cheques are the most widely used type of the negotiable instruments. Cheques are essentially the orders to a bank to remit the payment to their holder using the funds from their issuer.
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