What Is an Order Paper?
Let me explain what an order paper is. It's a negotiable instrument that's payable to a specified person or its assignee. For an instrument to be negotiable as an order paper, it has to be payable to the order of a specific person, meaning it designates an individual's name for payment. This is the opposite of a bearer instrument, which doesn't require naming anyone—anyone holding it can get paid.
Key Takeaways
You should know that an order paper is payable to a specified person or assignee. It names the individual who can receive payment. In contrast, a bearer instrument doesn't designate anyone, so whoever holds it can be paid. The most common example is a personal check. If you endorse an order instrument, it turns into a bearer instrument, which raises theft risks. To prevent that, use a special or restrictive endorsement.
Understanding an Order Paper
An order paper says 'pay to the order of,' naming a specific designee for payment. A bearer instrument says 'pay to the bearer,' so anyone with it can collect. You need to identify a named payee on the payee line for an order instrument. Bearer instruments skip the payee name and often lack a payee line altogether.
Take a personal check as an example—when you write one, you name a payee on the line starting with 'pay to the order of.' Only that named payee gets the specified amount. Other order instruments include registered bonds, bills of exchange (checks without interest), and promissory notes (written promises to pay). On the flip side, a $20 bill is a bearer instrument with no payee line; anyone holding it can use it for $20 worth of goods or services.
What Makes an Order Paper?
For a negotiable instrument to qualify as an order paper, it must meet specific criteria. It needs the drawer's signature, must be payable to the order of a named payee, include an unconditional promise to pay a specific sum to that payee, and be payable at a set time or on demand.
The instrument must include the phrase 'pay to the order of (named person or entity)' or 'to (named person or entity) or order.' If 'or order' is there, the named payee can designate someone else to receive the payment.
Characteristics of an Order Paper
- Bear the drawer’s signature
- Be payable to the order of a named payee
- Make an unconditional promise of payment of a specific sum to a named payee
- Be payable at a specific time or on demand
Endorsing Order Papers
When you endorse an order paper, it becomes a bearer instrument. For instance, if you get a check and endorse it, that check—once an order paper—turns into something anyone possessing it can cash, even if they're not the named payee. That's why I advise not endorsing checks until you're ready to deposit them.
You can avoid this by using a special endorsement, signing it over to another payee. On a check, write 'pay to the order of (named person or entity)' in the endorsement space and sign it. A restrictive endorsement ensures the instrument goes into a specific account.
Other articles for you
Mental accounting is a behavioral economics concept where people assign different values to the same money based on subjective factors, leading to irrational financial decisions.
Unrestricted cash is the portion of a company's liquid funds that can be freely used for any purpose, unlike restricted cash which is set aside for specific obligations like debt covenants.
This text is a comprehensive glossary of financial and economic terms starting with the letter 'O' from Investopedia.
Monetary aggregates measure the money supply in an economy to assess health, guide policy, and predict economic trends.
Cost accounting tracks and analyzes a company's production costs to support internal management decisions.
A certificate of insurance (COI) is a document that verifies an active insurance policy and outlines its key details to prove coverage.
Delta hedging is an options strategy to neutralize directional risk from price changes in underlying assets by balancing positions for a delta-neutral state.
The legal rate of interest is the maximum allowable interest rate on debts to prevent excessive charges by lenders.
A stock quote provides the current price and related data for a stock on an exchange to inform investors.
An account in trust is a financial setup where a trustee manages assets for a beneficiary according to specified terms.