Categories

Magento uses categories to organize products.  Categories hierarchies are supported.  A category can be set up to display static content, products or both.  It can also be included in layered navigation (is_anchor = Yes).

This tutorial will help you gain a solid understanding of how to create and manage categories in Magento:

http://www.magentocommerce.com/knowledge-base/entry/tutorial-creating-and-managing-categories