Derivatives have been getting a lot of press ever since the financial meltdown of 2008. So in laymen terms, what is a derivative? In it's simplest form a derivative is simply a contract.? According to wikipedia a derivative is "In practice, it is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments are to be made between the parties."
A derivative is not a modern instrument. Rice futures have been trading in Japan since the 1700's.
One common derivative type is an option. One common underlying asset is a stock.
One common derivative is called a Credit Default Swap (CDS). A CDS is simply a form of insurance used by some to protect against some kind of credit event.
Understanding dervivatives and especially being successful at using it as a financial tool requires experise, experience, and definitley not for a a non-sophisticated investor.
Source: http://neilski.typepad.com/chicago_gold_and_silver_i/2012/11/a-short-explanation-of-derivatives.html
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