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A negotiable instrument is a specialized type of "contract" for the payment of money that is unconditional and capable of transfer by negotiation. As payment of money is promised later, the instrument itself can be used by the holder in due course frequently as money. Common examples include cheques, banknotes (paper money), and commercial paper. In the United States, the Article 3 of the Uniform Commercial Code covers the use of negotiable instruments except banknotes (money) states California Business Attorney Steven C. Peck.

Differences from a contract:
A negotiable instrument is a contract, albeit not obvious in formation of the required offer, and consideration. Unlike ordinary contract documents, the right to the performance of a negotiable instrument is linked to the possession of the document itself (with certain exceptions such as loss or theft). The consideration for a negotiable instrument is the value given up to acquire it and the consequent loss of value in the prior holder. The instrument itself is understood as a right for payment and an obligation for payment evidenced by the instrument itself with possession the touchstone for the right of payment. The rights of a holder in due course of a negotiable instrument are better than those provided by ordinary contracts as follows:

The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque)
A lot of notice needs to be given to any prior party liable on the instrument for transfer of the rights under the instrument by negotiation.

Transfer free of equities--the holder in due course can hold better title than the party he obtains it from. Negotiation enables the transferee to become the party to the contract, and to enforce the contract in his own name. Negotiation can be effected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments). In addition, it includes the rule of a derivative title which does not allow a property owner to transfer rights in a piece of property greater than his own.

Promissory notes and bills of exchange are two primary types of negotiable instruments says Los Angeles Business Lawyer Steven C. Peck.

Promissory note
A promissory note is a written promise by the maker to pay money to the payee. Bank note is frequently transferred as a promissory note, a promissory note made by a bank and payable to bearer on demand. A maker of a promissory note promises to unconditionally pay the payee (beneficiary) a specific amount on a specified date.

A promissory note is an unconditional promise to pay a specific amount to bearer or to the order of a named person, on demand or on a specified date.

A negotiable promissory note is unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at fixed or determinable future time, sum certain in money, to order or to bearer. (see Sec.194)

A promissory note, briefly stated, is a promise to pay a sum of money. There are originally two parties in a promissory note. The one who makes the promise and signs the instrument is called the "maker" and the party to whom the promise is made or the instrument is payable is called the "payee"

Bill of exchange
A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque (check in American English), defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today.

A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. It is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three parties--the drawer, the drawee, and the payee.

The person who draws the bill is called the drawer. He gives the order to pay money to third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. he becomes an acceptor when he indicates his willingness to pay the bill.The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order.

A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable.

In some cases a bill is marked "not negotiable". In that case it can still be transferred to a third party, but the third party can have no better right than the transferor.