Hey,
Could someone please tell me what dragons blood, fairy dust and holy water do???

Holy water is a grenade like weapon that damages with holy energy

I read somewhere dragon's blood would be a material component for casting time stop spells but I don't know if that's true. Also they look like you can use them to upgrade items

If you mean the kind of holy water you find in the original Neverwinter Nights, then it, as well as the dragons blood and fairy dust, is used to upgrade weapons. A guy named Marrok in the basement of the arms shop in the Core district of Neverwinter can do this for you.

If you have Shadows of Undrentide, then it introduces an new kind of holy water in blue bottles. These are a kind of grenade weapons you can throw in combat and does damage to undead.

ta, that helps alot.