The term "coloured coins" refers to an additional layer built on top of the Bitcoin network that uses existing bitcoin to signify other — potentially physical — assets, expanding its use beyond simple currency. CoinDesk's Danny Bradbury explains the concept well:
Bitcoins are useful, but like dollars or euros they are only used as currency. Coloured coins look to change this by using bitcoins to represent other things. ‘Colouring’ a bitcoin means attaching a piece of information to it, which turns it into a token for something else.
For example, what if transactions in the bitcoin block chain could be used to represent, say, company stock, gold or a deed to a building? Then, someone could issue shares on the bitcoin network, or trade commodities on it.
This would give bitcoins a huge advantage over traditional ways of sending assets. If you want to send gold, company stock, or the physical deeds to a house today, this necessitates a complicated process involving notaries, registered deliveries and paper trails.
The coloured coin is still very much in its infancy, but there are multiple projects underway. ChromaWay and Colu are among the attempts to bring coloured coins to a broader audience.