Tridion folders are used to store components and subfolders and are similar to directories (or folders on windows) on a file system. A folder can also contain metadata which can be used to describe the content of the folder. Permissions for different users or user groups can be set per folder.
It is good practice to use the folder structure for generating the main navigation for the website. Using the folder structure for the navigation gives content editors a solid view of the navigation as opposed to other options. The drawback is that generating the navigation structure from within Tridion is slow. However there are remedies to this (todo: write about advanced navigation structure rendering)