An LED is a type of light source which is typically fairly small and has low power requirements.
An LED (Light Emitting Diode) is a semiconductor component which emits light (via electro-luminescence) when its forward voltage is sufficiently high.
In Arduino projects, small LEDs are commonly used as indicators. For example, it could be illuminated to show that a system is active/powered-on. LEDs typically operate at around 2-3 volts, requiring a current of 10-20 mA, meaning they can by powered directly from the digital output pins.
For safety, an LED should normally be used with a current-limiting resistor in series.
LEDs can also be used for other purposes, including general illumination, and in opto-isolators.