Magnets are an essential part of a compass and it is indeed a small magnet is what makes a compass point towards the North Pole.
A compass works by detecting the Earth's magnetic field which has two poles: North and South. The bar magnets commonly used for compasses are often marked N for the North Pole and S for the South Pole. Since like poles repel and unlike poles attract, the South Pole of the magnet is attracted to the Earth's magnetic north pole.
The most common way to make a DIY magnet involves a bowl of water, ring of paper and a magnetised needle. To magnitise the needle, simply rub a strong magnet against the needle - please do your own research for detailed instructions. All you need is a small magnet like a Rare Earth disc.