Financial instruments or investments such as options, futures or swaps that "derive" their value from the performance of an underlying security or index. For example options are derivatives because they have underlying stocks or assets on which their prices are based.
While shares are actual assets, derivatives represent contracts to buy or sell a particular security at a given point in the future for a particular price. Options, warrants and futures are derivatives. They can be used to lessen investment risk, but often their main attraction is that they are highly geared and can thus offer spectacular profits... and spectacular losses. As a rule, we do not advocate their use.