The best way to explain categories would be to say they are folders. They're not really folders but within the code they work for all intensive purposes the same. Let's get on to showing you some examples though so you can see what exactly is going on here.
You define categories inside a pages name. For instance…
help:creating-a-category
Is different than…
hlp-creating-a-category
In the sense that the first example is initiated with a category, 'help:' to be exact. The second is just a page with a convenient naming convention to help us. And that's really all it takes to use categories. When you are creating a page just prefix it with…
category:
And you're golden.
Here are some examples to help illustrate how this all works. Follow these links in order.
In General
In Category
In Nested
Lastly, nested categories are allowed. That's to say you are able to have 'development:programming:tutorials:getting-started' which has three nested categories that can each have pages and categories within them.