Derivatives consist of any security that 'derives' a value from another instrument.
Derivatives mainly consist of options such as puts and calls, as well as futures contracts, rights and warrants. Derivatives usually derive their value from stocks, currencies or commodities. Derivatives serve the primary purpose of allowing investors to 'hedge' against market risk. In essence, investors can buy insurance on instruments that they purchase. Derivatives also allow companies that buy or sell various commodities to lock in a price so that prices will be more predictable in the future.