For an excellent white paper on the concept of Colored Coins, as written for the Bitcoin project, see https://bitcoil.co.il/BitcoinX.pdf
Colored coins are a method to track the origin of Nxt coins, so that a certain set of coins can be set aside and conserved, allowing a party to acknowledge them in various ways. Such coins can be used to represent arbitrary digital tokens, such as stocks, bonds, smart property and so on. They can even represent real-world objects.
When a coin is "colored", it can be traded on the Nxt network just like any other coin in the system. This will allow NXT to be exchanged for whatever object the colored coin represents.
This concept forms the basis for the Nxt Asset Exchange.