Ferro fluids contain huge numbers of microscopic particles of a magnetic material (e.g. iron). These particles react to magnetic fields, and in the process exert force on the fluid suspending them, causing the entire fluid to behave as if it is magnetic.

Your probably know of usual fluids, like water, or ethanol or olive oil. A ferrofluid is different, unlike those fluids. The first main difference is that these fluids are all composed on one or similar kinds of a molecule: water of water molecules, ethanol of ethanol molecules and olive oil of oleic acid, palmitic acid and other fatty acids. So they are all molecular fluids.

Ferrofluids are not! They have a molecular fluid as the main component, which can be water or some organic solvent, but what makes them respond to magnetic fields are small magnetic nanoparticles that are dispersed in there. The nanoparticles are so small that their random thermal motion is larger than their motion due to gravity, so they do not settle down. If they were big, like the pulp in your orange juice, they would fall at the bottom exactly like the pulp. But they are small, exactly like the fat droplets in your homogenized milk you have in your fridge and keep randomly moving around, making the ferrofluid a continuous, homogeneous fluid, even though it has solid particles in a liquid.

But these particles are magnetic, so why don't they come together by attracting each other ? First of all, because they constantly move and rotate, their magnetic dipole (their orientation) is changing all the time, so they are not like permanent magnets. But we also help them stay separated by adding a bit of soap. The soap sits on the surface of the nanoparticles, preventing them from touching. This way, they cannot form big clusters which would fall at the bottom and behave like one big magnet.

So, when you don't have a magnet near a ferrofluid, it behaves like a fluid and its surface is pretty flat. But if you put a magnet near it, first the entire fluid becomes attracted to the magnet (so you can raise it inside a bottle with a magnet outside the bottle, which is pretty much what they did in NASA to move ferrofluid rocket fuel to the engine when there's no gravity). Secondly, you can make very pretty shapes like the beautiful art of the artist Sachiko Kodama sachiko .

But how does the surface make these spiky shapes? It is all an interplay between the competition of (1) the energy required to deform a surface called surface tension which likes to keep surfaces flat and droplets spherical, and (2) the energy of the magnetic field and how it wants to follow the field lines.