A good place to start learning about derivatives is the Wikipedia entry for “Financial Derivative”. There are many different types of derivatives; and, derivatives are where Wall Street firms makes most of their money. There are hundreds of trillions of dollars of outstanding derivatives. This is why Wall Street would be adamantly opposed to outlawing derivatives.
A few yeas ago, I tried to get a rudimentary understanding of some of these derivative schemes…and, they definitely are schemes.
Basically, I think of a derivative as a financial product that is derived from a set of underlying financial products.
One derivative scheme which really struck me was the repackaging of risky mortgages. Someone claimed that, mathematically, by combining a number of risky mortgages into a derivative package, you could reduce the total risk from what it would be if these mortgages remained separate. Such a derivative package could then be sold to an investor as an investment. When SHTF in 2008, I believe AIG was stuck with having underwritten a bunch of these derivatives where most of the mortgages defaulted. Thus, those derivative investments were practically worthless; and, AIG was on the hook. Hence the bail-out, rather than let some of these mega Wall Street firms and their shareholders go belly up, which is what really should have happened.
A second type of derivative which caught my interest was the “interest rate swap”, where a financial institution makes a variable-interest rate loan to a state, or municipality, or university, etc.; and, also sells that entity a scheme that will supposedly fix the rate of interest on the loan. On paper, this scheme appears legit; but, behind the scenes, the financial world was manipulating certain global rates which caused the entities to lose more money than they had anticipated, while the financial institutions made money hand over fist. - Here’s an article which explains this latter scheme:
The Global Banking Game Is Rigged, and the FDIC Is Suing – Apr 14, 2014 - Ellen Brown - truth-out