They are sophisticated investments that should not be undertaken casually. Yet, if you've got a strong stomach for risk, options can provide a helpful hedge to protect yourself from dips in stocks or indexes you already own, while futures, in small amounts, can offer an alternative form of portfolio diversification. On the other hand, you have to realize that futures and options are not for lazy investors. Unlike stocks, which can be purchased and held for years, options and futures are time-based assets with deadlines for action. A derivative is a financial instrument that does not constitute ownership, but a promise to convey ownership.
Examples are options and futures.
The most simple example is a call option on a stock. An option is a derivative. That is, its value is derived from something else. In the case of a stock option, its value is based on the underlying stock. In the case of an index option, its value is based on the underlying index.