The correct procedure of negotiating an instrument follows certain legal principles which have been gradually developed by commercial usage. An instrument which is payable to bearer may be negotiated by a holder in due course merely by transferring it to another party, and this act is known as delivery. But if the document is payable to the order of a specified individual, the holder must indicate the surrender of his title by writing his signature upon the reverse side of the instrument. This act is known as indorsement. Therefore negotiation is accomplished either by simple delivery or by delivery and indorsement. The payee who performs the act of indorsement is called the "indorser," and the party to whom title is transferred is known as the "indorsee."

Indorsement may serve another purpose in adding to the strength of an obligation. If A gives B a promissory note, it may be further strengthened by having C add his indorsement. Thus C gives his conditional promise to reimburse B in the event of refusal on the part of A.

The various forms of indorsement may be classified in respect to parties mentioned or qualifications stipulated. As to parties, indorsements may be either "special" or "blank." A special indorsement states the name of the indorsee, as, "Pay to the order of John Smith," who alone can further transfer the instrument. When the indorsee is not designated, the form is called a blank indorsement. The instrument may then be negotiated by any holder upon mere delivery, for no further indorsement is required. This form may well be used in depositing a check with a bank. The depositor who signs a blank indorsement thus allows his bank complete freedom in securing payment of the check, for the funds are payable to any holder.

Classified on a different basis, indorsements are either unqualified or qualified and restrictive. The illustrations given above are both unqualified, since they contain no statement which limits the free negotiation of the instrument. A qualified indorsement transfers the title of an instrument, but at the same time exempts the indorser from the usual liabilities which result from this act. To accomplish this purpose, the indorser writes before his name the expression "without recourse," and thus serves notice on any holder that he cannot enforce his usual claims against the indorser if the original drawee refuses to meet his obligation. An instrument may be qualified in another way by placing upon it a restrictive indorsement, such as the following: "Pay to the X Bank for collection." The indorser thus names the bank as indorsee for a specific purpose, which in this case is to secure payment of the instrument. The consequence of this form of indorsement is to end the negotiability of the instrument, for the indorsee is prohibited from further transferring it.