A bearer is a person who is in possession of a negotiable instrument, a financial instrument made payable to whoever has it, rather than to a specific named person. Bearer bonds are an example of a negotiable instrument. These financial instruments are also said to be unregistered, as the original issuer or drafter keeps no records about who possesses them and does not keep track of transfers. The risk with negotiable instruments is that possession indicates ownership and control, which can be a problem in the event of a theft. This can also be an advantage in other cases, however.
The bearer can present the instrument for payment of funds due or to be entitled to the right to a vote, in the case of an equity instrument. The negotiable instrument must be honored unless there is clear evidence of fraud, such as markings on the document indicative of the use of counterfeiting. Bearers can also freely transfer the instruments in their possession without needing permission from the original drafter and without the need to re-register.
In a simple example of a negotiable instrument, a person could write a check out to “bearer” or “cash.” If this person gives the check to someone else, that individual could choose to go to the bank and cash it, or to transfer it to another person. People can also turn a check written to a specific person into a negotiable instrument by endorsing the back of the check.
Transferring of negotiable instruments is much easier than that of other types of financial documents. This can work to the advantage of the parties involved in some situations, where a smooth transfer may be advantageous. However, these instruments also have to be carefully secured to avoid thefts and other situations where someone obtains an instrument and redeems it, acting as the bearer. One method can be to keep negotiable instruments secured in a bank, keeping photocopies on hand as a record while the originals are securely stored.
One advantage to a negotiable instrument is the ability to write out a check, promissory note, or other document without a specific payee in mind. This can be useful in some situations. People can increase security and reduce the risk of theft, fraud, or uncontrolled transfers in other situations by creating nonnegotiable instruments. With these financial instruments, a specific person is named and the instrument cannot be redeemed or transferred by anyone else.
