A derivative is a contract whose value is derived from the price movements of an underlying asset — a stock, a commodity, an interest rate, a currency, an index, or another derivative. The three families that matter are:
A bilateral obligation to buy or sell a specified asset at a specified price on a specified future date. Traded on exchanges with daily mark-to-market and margin posting.
A right (not an obligation) to buy (call) or sell (put) the underlying at a stated strike price on or before expiration. The buyer pays a premium; the writer collects it and takes on the obligation.
Bilateral exchanges of cash flows — most often floating-rate interest for fixed-rate interest. Generally institutional, though some retail platforms now offer simplified versions.
Derivatives are leverage instruments by nature: a small premium or margin deposit controls a much larger notional exposure. Used carefully they hedge concentrated positions, lock in prices for future cash needs, or reshape a portfolio’s risk profile without forcing taxable sales of the underlying. Used carelessly they take down accounts very quickly. The mechanics of options (strategies, Greeks, taxation), futures (rolls, basis, hedging tactics), and the full strategic toolkit live in their own chapter: see chapter “Derivatives”.