The Flag is a unit spawned with a FlagStand object, and will respawn when captured. When a player touches this object's Handle, which must be a child of the Flag object, which is a Part named "Handle", the flag will be added to the player's backpack and will appear in their hand. A player cannot select other weapons while carrying a flag, and can drop the flag at anytime by pressing "Backspace" on the keyboard. If the player carrying a flag steps onto another FlagStand of a different team color, the flag will be removed from the player's backpack and a point will be added to the user's leaderstats, if provided. The flag will then regenerate at the originating flag stand. This allows for 'Capture the Flag' to be made games very easily, which was the reason for its creation.
The Flag and FlagStand objects were created to allow developers to make 'Capture the Flag' style games quickly. However they have been deprecated and developers are advised to design their own systems which will be more flexible and reliable.
To get started with this, developers can use the 'Capture The Flag' template place provided by Roblox which has a fully functioning system developers can take and use in their own games. A link to the place, which is free to edit, is here.