When new image is uploaded to post or category, it is automatically resampled in predefined sizes, that
can be used in different places of your store. For example, one size can be used for post previews on
category page. Another size can be used for small post previews in left column. One more size can be used for larger post previews on main page etc... Moreover, when you insert uploaded images into text, youcan select one of predefined sizes as well.
You can add as many custom thumbnail sizes as required. But keep in mind, that when you add/update a size, new dimensions will be applied to all future uploads. Images that were uploaded previously will stay unchanged. If you want to update sizes of existing images, you should regenerate them.