A vocabulary is a named collection of taxonomy terms. Think of it as a category list. Common examples include Tags, Categories, and Topics.
Create vocabularies under Structure then Taxonomy. Each vocabulary can have its own fields, meaning taxonomy terms within it can store more than just a name. For instance, a Locations vocabulary could have fields for latitude, longitude, and a photo.
Vocabularies can be flat lists or hierarchical trees, depending on your content structure. They are referenced by content through entity reference fields configured to target a specific vocabulary. Well designed vocabularies make content classification and filtering much easier. Take time to plan your taxonomy early in a project, because changing it later often requires data migration. A thoughtful taxonomy structure pays dividends for years.