A colour wheel is a disc that is positioned in front of the light beam that has various coloured gels or dichroic filters fitted to the wheel to enable the operator to position the wheel to a colour which will then be shown when the light beam passes through it.
Very simply colour wheels had a few coloured gels on it and was placed in front of a traditional lighting fixture such as a Par Can and it was constantly rotated by an electric motor.
On intelligent lighting fixtures they use dichroic filters and again an electric motor is used to rotate the colour wheel. The intelligent fixture will allow you to select any of the colours it has from your DMX console. Most fixtures of this type you can create a rainbow effect, basically this is just the wheel constantly rotating but you can have varying speed. Some fixtures allow rotation in both directions.
Another type of colour wheel is the CMY Colour wheel. This is either 3 coloured discs of Cyan, Magenta and Yellow or six coloured discs that overlap each other. Depending on each of the coloured discs posistion will create an almost infinite number of colours. Sometimes they are not actually wheels but tabs, see picture below of the CMY Colour Tabs from GLP YPOC 250 Colour.