A derivative is a contractual agreement between two or more parties, and as its name suggests, it derives its value from an underlying financial product or asset. The underlying assets used in derivatives include interest rates, stocks, bonds, foreign exchange currencies, commodities and credit.
Derivatives are traded either over-the-counter (OTC) or on an exchange. Derivatives are used for a variety of reasons, by primarily very sophisticated investors and institutions, including for hedging, speculation, arbitrage, leverage and portfolio management purposes.
Typically, derivatives fall into one (or a combination) of: forwards/futures, swaps and options.
Derivatives are complex instruments. Due to the complex nature of derivatives, do your research and make sure you understand how they work before considering investing in this type of investment.